Financial Ratios Analysis for Corporations

Financial ratios help us identify some of the financial strengths and weaknesses of a company. The ratios give us a way of making meaningful comparisons of a firm’s financial data at different points in time and with other firms. We could use ratios to answer the following important questions about a firm’s operations:

How liquid is the firm?

Is management generating adequate operating profits on the firm’s assets?

How is the firm financing its assets?

Are the owners (stockholders) receiving an adequate return on their investment?

The following are the ratios described in this course:

1. How liquid is the firm?

Current ratio

Quick ratio

Accounts receivable turnover (average collection period)

Inventory turnover

2. Is management generating adequate operating profits on the firm’s assets?

Operating income return on investment

Operating profit margin

Gross profit margin

Asset turnover ratios, such as for total assets, accounts receivable, inventory, and fixed assets

3. How is the firm financing its assets?

Debt to total assets

Debt to equity

Times interest earned

4. Are the owners (stockholders) receiving an adequate return on their investment?

Return on common equity

This course is perfect for introductory finance students and fundamentalist traders.