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There is a lot to be said for valuing a company, it is no easy task.However, through financial ratio analysis, it is easy to work with these numbers in an organized manner.
It is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.
Cash Ratio = (Cash Marketable Securities)/Current Liabilities Activity Ratios: Asset turnover ratios indicate of how efficiently the firm utilizes its assets.
Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
Debt Ratio= Total Debt/ Total Assets Debt to Equity = Total Debts/Total Equity Interest Coverage Ratio = EBIT/Interest Charges Market Ratios: Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.
Return on Assets = Net Income/Total Assets iii) Return on Equity: It is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock.
Return on Equity= Net Income/ Shareholders Equity Liquidity Ratios: These provide information about a firm's ability to meet its short-term financial obligations.
These are concerned with the return on investment for shareholders and with the relationship between return and the value of an investment in company's shares.
Earnings per share= Net Earnings/Number of shares Payout Ratio= Dividend per share/Earnings per share Dividend Yield= Dividend per share/Current Market Price per share P/E Ratio= Market price per share/Earning per share To conclude, we have briefly reviewed a variety of ratios commonly used in strategic planning.
Ratio analysis is a useful management tool that will improve understanding of financial results and trends over time and provide key indicators of organizational performance.
Financial ratios are relative magnitude of two selected numerical values taken from an enterprise's financial statements.