Financial Ratios and Analysis

Financial Ratios and Analysis

a.)   Ratios are useful indicators of a firm's performance and financial situation.   Most ratios can be calculated from information provided by the financial statements.   Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms in the same industry.

Managers use ratio analysis to identify situations needing attention; potential leaders use financial analysis to determine whether a company is creditworthy; and stockholders use ratio analysis to help predict future earnings, dividends, and free cash flow.

  b.) The 2011 current ratio is calculated by using the following formula:
current assets/current liabilities= 2,680,112/1,039,800= 2.58:1
The 2011 quick ratio is calculated by using the following formula:
current assets-inventories/current liabilities=2,680,112-1,716,480/1,039,800=.93:1

The higher the current ratio the better the company’s liquidity because it provides insight about a firm's ability to meet its short-term financial obligations; therefore after calculating the 2009, 2010, and projected 2011 current ratio using the current assets/current liabilities formula we find the following ratios:
2009: 1,124,000/481,600=2.33:1
2010: 1,946,802/1,328,960=1.46:1
projected 2011: 2,680,112/1,039,800=2.58:1
The projected 2011 balance sheet leads us to believe that the year 2011 will have more liquidity than in the previous 2 years.

Ratios are very useful to managers, bankers and stockholders for various reasons.   Liquidity ratios would have possibly a different impact on these analysts.   Short-term creditors, such as bankers, prefer a high current ratio (type of liquidity ratio) since it reduces their risk of letting a company borrow money.   Stockholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business.   Managers can use the liquidity ratio to compare several years’ worth of data to help forecast areas or strength and weakness.   A manager strives...

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