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Choose 4 different financial ratios from your text, course materials, and/or Web resources.

Answer the following questions:

What do they tell you about a firm?

Why is it important for a bank to understand these financial ratios?

Why is it important for an investor to understand these financial ratios?

Financial ratios are important when it comes to understanding the financial health of a company. My colleagues and I work for a financial service and are discussing the merits of the various financial ratios. We are to identify for financial ratios and what they tell us about it for and why it is important for banks to understand these financial ratios as well as the importance it has for an investor to understand these financial ratios. The company that I will be discussing about is the Coca-Cola Company. I browsed through the Coca-Cola website and also the "investors" portion of a website and looked at through their financial statements in 2008. These included the income statement, balance sheet and cash flow statement for the 2006 fiscal year. When conducting the market value ratio for Coca-Cola, it turns out that the P.E. ratio is 22.02 and the market to book value is 6.61. The market value ratio is a measure of how expensive the stock is (Brooks, 2010). The higher the price earnings ratio, the more we are paying for each dollar of earnings. The higher the market to book value, the more we are paying for each dollar of equity we have on the balance sheet. With the price earnings ratio at 22.02, it shows that is a high-growth company or that it may be growing faster than other companies. With a market to book value of 6.61, it shows that Coca-Cola how profitable the company is and shows how well they are able to utilize their assets. Secondly, we will be looking at Coca-Cola's profitability ratio. With the profit margin, it shows

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...Evaluation & Alternatives ---------------------- According to the chapter of financial ratio, the Operating Profit Margin, Net Profit Margin and Return on assets and equity had downward trend since 2008, will drop to its record low in 2013, then upward trend afterwards. However, the Gross profit Margin will be kept as same as that before expansion. Moreover, Efficiency of Cash Management will be done better on rise of Creditor Ratio despite Debtor Ratio will go up. This can be improved by adjustment of period in accounts receivable during 2013-17. Furthermore, the Liquid Ratio and Current Ratio will steady grow stating higher realization ability of corporate assets after expansion. What’s more, the D/E Ratio and Basic Earnings per Common Share will boom. Despite, the productivity will not be looking good. The Inventory Turnover will fall to 2.5 which is 19.61% lower than average value in 2008-12. The Total Asset Turnover will decrease its lower level while the Average Collection Period will reach to the higher level. And the Debt ratio will maintain in risky level. Don’t forget, extra 400 stores & £100M-worth-new equips and stocks will be bought. When look into the balance sheet, there are negative cash £21,493.24 and £6,406.51 in year 2013 and 2014 respectively. The extra £279 million needed to maintain healthy capital structure. The alternatives are as follows. 1. Right issue - Issue of rights to buy additional securities in a company made to the company's existing...

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...Finland The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited With the Modern Developments in the Web-Based Publishing Abstract This web-based publication is an addendum to a previous review of the research and research trends in financial ratio analysis. The first purpose is to add more current references to the previous review. The second purpose is to emphasize the changes facilitated by the modern World Wide Web based publication practices and their impact on the availability of scientific publications. The new references are listed only without detailed reviewing, since no drastic additions have come to the fore in the field. However, it is felt that the additions are sufficient to warrant this addendum made readily possible by the option of making this publication available online. Keywords: Financial statement analysis, financial ratios, review, electronic publishing Referencing: Salmi, Timo, Jussi Nikkinen & Petri Sahlström (2005). The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited. University of Vaasa, Finland. URN:NBN:fi-fe20051937. Available from World Wide Web: <URL:http://www.uwasa.fi/~ts/wbfa/wbfa.htm>. Acknowledgements for useful discussions: Prof. Ilkka Virtanen and Library Managing Director Vuokko Palonen. Purpose Salmi and Martikainen (1994) presented a review of the theoretical and empirical basis of financial ratio analysis. In particular,...

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...Financial Ratios & Other Financial Analysis Tools Here is a list of many ratios used to analyze a company's financial condition - along with an explanation of why they are considered to be important. Liquidity Ratios * Current Ratio * Acid Test Ratio * Average Collection Period Coverage Ratios * Times Interest Earned * Net Income + Non-cash Exp / Current Portion of LT Debt Leverage Ratios * Fixed Assets / Tangible Net Worth * Debt to Tangible Net Worth | Operating Ratios and Indicators * Gross Profit Margin * EBT / Tangible Net Worth * EBT / Total Assets * Fixed Asset Turnover Ratio * Total Asset Turnover Ratio * E.B.I.T.D.A. ("Ebitda") Expense to Revenue Ratios * % Depreciation, Depletion & Amortization / Revenue * Officers' &/or Owner's Compensation / Revenue Ratio Fusion! * Altman's Z-Score for Privately Held Firms | Banks often use ratios in loan contracts with benchmarked minimums or maximums (aka 'Covenants'). Even if covenants are not listed in your loan contract, banks still look at them. You will add credibility to your financial statements if you include financial ratios and indicators in your presentation to the bank. They will think you use these indicators internally, and they'll love you for it! Actually; If you're not using Financial Analysis Tools and Benchmarks internally, you should strongly consider it. LIQUIDITY RATIOS Liquidity ratios indicate...

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...Handout 6 Analyzing Your Financial Ratios Taken from http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html Overview Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis: Income, Profitability...

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...different financial ratios from your text, course materials, and/or Web resources. * Answer the following questions: * What do they tell you about a firm? * Why is it important for a bank to understand these financial ratios? * Why is it important for an investor to understand these financial ratios? * Post a new topic to the Discussion Board that contains your answers to the above questions Financial ratios are measurements used to analyze entities of financial performance. They are several financial ratios one can choose from, the main four are; profitability ratios, efficiency ratios, liquidity ratios and solvency ratios. Each ratio has different rules and they perform in their own ways. They are important tools that evaluate the profitability, efficiency, liquidity and solvency of an entity of the firm. Profitability ratios help users of an entity financial statements determine the overall effectiveness of management regarding returns generated on sales and investments (Manley, 2009). Normally used profitability ratios are gross profit margin, operating profit margin and net profit margin. Gross profit margin measures profitability after considering cost of goods sold, while operating profit margin measures profitability based on earnings before interest and tax expense. One margin that’s often referred to as the bottom line and takes all expenses into account is the Net profit margin (Manley, 2009). Efficiency ratios are known as the ratios that...

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...Profitability ratios Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return Gross profit margin or Gross Profit Rate OR Operating Income Margin, Operating profit margin or Return on sales (ROS) Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the firm has no non-operating income. (Earnings before interest and taxes / Sales[11][12]) Profit margin, net margin or net profit margin[13] Return on equity (ROE)[13] Return on investment (ROI ratio or Du Pont Ratio)[6] Return on assets (ROA)[14] Return on assets Du Pont (ROA Du Pont)[15] Return on Equity Du Pont (ROE Du Pont) Return on net assets (RONA) Return on capital (ROC) Risk adjusted return on capital (RAROC) OR Return on capital employed (ROCE) Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) Efficiency ratio Net gearing Basic Earnings Power Ratio[16] Liquidity ratios Liquidity ratios measure the availability of cash to pay debt. Current ratio (Working Capital Ratio)[17] Acid-test ratio (Quick ratio)[17] Cash ratio[17] Operation cash flow ratio Activity ratios (Efficiency Ratios) Activity ratios measure the effectiveness of the firms use of resources. Average collection...

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...Financial Ratios Financial ratios are essential tools for fundamental analysis, which determines the value of a company using both qualitative and quantitative methods. Companies collect numerical data such as sales and inventory every day; the calculation of financial ratios allows the company, its investors, and banks to see through the masses of data and estimate the company's intrinsic value (Loth, 2012). Types of financial ratios include liquidity ratios, profitability indicator ratios, debt ratios, and operating performance ratios, among others (Drake, n.d.). The cash conversion cycle (CCC) ratio is a liquidity ratio that is less common than some other liquidity calculations, but in many cases it is more useful because it takes into account how long a full cycle requires -- how long it takes for the company to sell inventory, receive payment, and pay its own creditors (Loth, 2012). The cycle is a dynamic liquidity indicator rather than a static one like the more common current and quick ratios (Lancaster & Stevens, 2011). The CCC ratio evaluates the company's use of working capital, and is computed using the Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO), which are found in the company's current accounts (Loth, 2012). The following formula is used: CCC = DIO + DSO - DPO. A larger CCC means that the cycle is longer and therefore less liquid, potentially increasing the need to borrow. However, this is a relative...

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...Financial Ratio Analysis It is difficult to infer organizational performance from one or two simple numbers. Nevertheless, in practice a number of different ratios are often calculated in strategic planning endeavors and, taken as a whole and with some caution, these ratios do provide some information about the relative performance of an organization. In particular, a careful analysis of a combination of these ratios may help you to distinguish between firms that will eventually fail and those that will continue to survive. Evidence suggests that, as early as five years before a firm fails, one may be able to detect trouble from the value of these financial ratios.1 In this note, the basic financial ratios are reviewed, and some of the caveats associated with using them are highlighted. The ratios tend to be most meaningful when they are used to compare organizations within the same broad industry, or when they are used to make inferences about changes in a particular organization's structure over time. LIQUIDITY RATIOS In order to survive, firms must be able to meet their short-term obligations—pay their creditors and repay their short-term debts. Thus, the liquidity of the firm is one measure of a firm's financial health. Two measures of liquidity are in common: Current ratio = current assets / current liabilities Quick ratio = (cash + marketable securities + net receivables) / current liabilities The main difference between the current...

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