Financial Performance Ratio Analysis

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Performance Measurement Tools Ratio Analysis Liquidity Ratio According to Gitman and Zutter (2012) Liquidity ratio is the ability to satisfy its short-term obligations as they come due. Also, liquidity refers to the solvency of the firm’s overall financial position—the ease with which it can pay its bills. There are two ways in measuring the liquidity. The current ratio and the quick (acid – test) ratio. Current Ratio measures the liquidity of current assets over its current liabilities. Also, current ratio is the most commonly used financial ratio. It is commonly used because it is very easy and convenient to use and it also give the owners of the firm the data that they may need in making the decisions. Quick (acid – test) ratio is just…show more content…
Long-term debts commit a firm to a stream of contractual payments over the long run which is mostly the concern of the financial analyst. More debt means greater risk of being unable to meet its contractual debt payments. The firm’s ability to repay debts is what current and prospective holders and lenders pay their attention to because creditors’ claims must be satisfied first before earnings can be distributed to shareholders. Generally, when a firm uses more debt for their total assets it means greater financial leverage for them. Financial leverage is the magnification of risk and return through the use of fixed-cost financing, such as debt and preferred stock. When a firm uses more fixed cost debt, the expected risk and return will be greater. There are two general types of debt measures: the degree of indebtedness and ability to service debts. First, the amount of debt relative to other balance sheet amounts is known as the degree of indebtedness. The debt ratio is a popular measure of it. It measures the proportion of total assets financed by the firm’s creditors meaning the higher this ratio, the more of the amount of other people’s money is being used to generate…show more content…
This indicates that the higher the gross profit margin, the better- that is the lower the relative cost of merchandise sold. Operating Profit Margin measures the percentage of each sales remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted. Operating profits are pure because they measure only the profits earned on operations and ignore interest, taxes and preferred stock dividends. The management prefers a high operating profit margin. Net Profit Margin measures the percentage of each sales remaining after all cost and expenses including interest, taxes, and preferred stock dividends have been deducted. This indicates that the higher the firm’s net profit margin, the better. Earnings per share represent the amount earned on behalf of each outstanding share of common stock. Return of total asset measures the overall effectiveness of management in generating profits with its available assets. The higher the firm’s return on total assets the better. This is also called the return on investment (ROI). Return of equity measures the return earned on the common stockholders’ investment in the firm. The owners of the firm are better off when the return of equity is

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