StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Business Finance Ratios - Essay Example

Cite this document
Summary
It indicates about the capability of the firm to pay off its short term liabilities with its short term assets. Ideally a ratio of 1:1 is being considered good however in the case…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.2% of users find it useful

Extract of sample "Business Finance Ratios"

MEMORANDUM Riordan Manufacturing & Kuddler Fine Foods selected ratios and their significance is discussed below: Ratios Formula Riordan ManufacturingKuddler Fine FoodsCurrent ratioCurrent Assets/Current Liabilities2.087:116.94:1Debt ratioTotal Debt/Total Asset36%28%Profit marginNet Profit/Sales3.85%6.26%Return on AssetsNet Profit/Assets5.65%25.29%The average P/ECurrent ratio is the most important measure of the short term liquidity of the organization. It indicates about the capability of the firm to pay off its short term liabilities with its short term assets.

Ideally a ratio of 1:1 is being considered good however in the case Riordon, the ratio is more than 2. However, it must also be noted that having higher current ratio can be detrimental to the overall financial health of the organization as too much resources will be engaged into non-productive use. In case of Kuddler Fine Foods, since the company is engaged into grocery business and sales mostly on cash therefore it has to carry higher inventories.Debt ratios signify the use of debt in acquiring the assets of the company.

It signifies how the company has financed its assets and through what combination of debt and equity. Riordan Manufacturing has a higher debt ratio as compared to Kuddler foods however it must also be noted that the use of higher debt may also be favorable for the firm as it allow them to magnify their P/E ratio due to the impact of debt on taxable income of the firm. Apart from that the higher debt will allow firms to get the tax benefits also. However it also must be noted that the higher debt may be risky as taking more debt means putting on more burden on the existing resources to pay back the debt rather than being channeled into the more productive resources.

Profit Margin is a ratio of great importance as it actually indicates what company is earning after paying off all its costs. This is in its essence is one of the key ratios of the success of the firm. In this regard, the profit margin of Riordan Manufacturing is less than that of the Kuddler Fine Foods. This can be because of the differences in their industry. Riordon being in manufacturing sectors has to incur costs which Kuddler, being in grocery business, may not incur. Further, the low profit margin for Riordon may also be attributed to its higher fixed costs ratio in its overall cost structure.

Return on Assets is another very critical indicator of the how efficient firm is in running and managing its resources. High asset turnover and return on assets clearly indicate the level of professionalism and management approach. The ratio is significant in the sense that it provides management the vital indicator of how the firm is managing its assets to derive the sales. A low ratio would mean that it is taking more assets of the firm to generate the desired level of the return thus inefficient approach to managing the firm resources.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Business Finance Ratios Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Business Finance Ratios Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/miscellaneous/1545888-business-finance-ratios
(Business Finance Ratios Essay Example | Topics and Well Written Essays - 500 Words)
Business Finance Ratios Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/miscellaneous/1545888-business-finance-ratios.
“Business Finance Ratios Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/miscellaneous/1545888-business-finance-ratios.
  • Cited: 0 times

CHECK THESE SAMPLES OF Business Finance Ratios

Financial Ratios. Jardine Cycle and Carriage

Summary/Workings for Financial ratios 27 1.... The functions of Astra with respect to its consumer finance segment were able to generate enormous profits with the improvement in the debt position, constant margin of interest rates and proficient liquidity... The company operates in various parts of the world: Singapore, Vietnam, Indonesia and Malaysia (Bloomberg business Week, 2011).... However, the company undertakes its business within the automotive segment of the market....
14 Pages (3500 words) Research Paper

Short-term obligations

… The study recommends that the management of PepsiCo formulate policies towards improving its efficiency and liquidity ratios.... It is evident from the study that businesses apply a variety of ways to finance their short term obligations.... The cash that would have been paid to the creditors can then be used as a source of finance to ‘short-term' obligation....
5 Pages (1250 words) Essay

Managing Operations and Finance

The ratios are divided into profitability, liquidity and gearing ratios.... Major financial ratios are compared and in addition, historical share prices are also analyzed of both companies in order to identify which company has a better market capitalization and better reputation from investor's perspective.... Keeping in pace with the globalization, the company is planning to expand its business in other frontiers.... Marks and Spencer's well established business attracts a great deal of consumer base irrespective of demography....
10 Pages (2500 words) Essay

TR Limited: Financial Evaluation and Financing Decisions

12 Pages (3000 words) Essay

Profitability Ratio Analysis

The financial appraisal of The GAME Group Plc can be performed by computing the appropriate financial ratios of the company and comparing it with the prior year in order to monitor growth or decline in the ratios.... hellip; The financial ratio analysis provides the most effective result when it is compared with the benchmark ratios of the industry, but in the absence of the missing information, the ratios of the current year are compared with the ratios of the prior year....
15 Pages (3750 words) Assignment

Ratio Analysis for Apple Company

ratios can be either favorable or unfavorable depending on whether the increase or decrease is in the desired direction (Dess 2012).... For our analysis of Apple Incorporation's financial statement of the year 2012 compared to that of the year 2011, we will categorize ratios into the following - Profitability ratios; Liquidity ratios; Efficiency ratios and Capital structure ratios.... Profitability ratios They measure the ability of the company to generate profits from their asset investments....
9 Pages (2250 words) Essay

Capital and Liquididty Ratio Analysis

From the cash flow statement, the company's ability to meet its debt obligations can be determined.... An analysis of the cash flow statement will also… The cash flow statement is composed of three broad category i.... .... cash from operating activities, investing activities and financing activities. ...
9 Pages (2250 words) Essay

A Quicker Way for the Directors to Pay Dividends

rofitability ratios determine the ability of a business to generate profits after netting all the expenses incurred during the year.... These ratios include: ... The problem of financing a company mostly by share capital is that in the event of poor performance whereby a company continuously makes losses, the shareholder may decline to commit their monies further in such a business (Ariff and Hassan, 2008).... A high ratio is indicative of good performance whereas lower rate shows the business is performing poorly....
8 Pages (2000 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us