New Chief Financial Officer



New Chief Financial Officer

Introduction

The theory of financial ratios was popularized by a professor of Columbia Business School, Benjamin Graham. As a finance manager of a firm, one must need to know how the firm is performing. Performance of the firm can be measured by different tools, but the key tool, which truly depicts the actual position of the firm, is Financial Ratio Analysis. Ratio analysis is not only vital for the managers, but it is also important for other stake holders like investors and stock holders. These ratios help the stakeholders to assess the financial health of the firm.

Importance of financial ratio analysis for stakeholders

Ratio is the mathematical relation between two quantities. Financial ratios are tools which help managers to understand and interpret the company's financial position and its progress towards the achievement of company goals. These ratios can further be compared with the industry ratios to determine where actually the firm is standing as compare to its competitors so that managers can take the necessary actions. Fundamental analysis of financial ratio further lead to investment decision because without knowing the actual financial position of a firm one can only speculate. Ratios are classified in following types.

Liquidity Ratios

Profitability Ratios

Activity Ratio

Financial Leverage Ratios

Shareholder Ratios

All of the above ratios have their own importance in the financial analysis of a firm. Being a newly appointed CFO of a firm, I would select liquidity, profitability and financial leverage ratios for initial analysis and the financial understanding of the firm.

Liquidity Ratios

Liquidity ratios provide information regarding the company's ability to meet its short term obligations using assets which can easily convertible into cash. They would allow me to understand how quickly the firm is able to generate cash. They also reflect the performance of the firm under the short term economic conditions. Analysis of current and quick ratio comes under liquidity ratios. Current ratio can be obtained by dividing the total current assets by the total current liabilities, and quick ratio can be calculated by deducting inventory from total current assets and then divide the outcome by the total current liabilities.

Generally, higher liquidity ratios depict the better ability of the firm to meet its short term obligations. If the firm has a large amount of current assets than current liabilities, it is an assurance that the will be able to satisfy immediate obligations. An operating cycle should be kept in mind. If the ...