Financial Ratios, Risk and Debt Financing considered by a Manager

Important Ratios to Be Considered3

Comparison of a Market Leader and a Small Business4

Graphical Representation of the Ratios5

Debt Financing5

Relation between Risk and Return6

Beta6

Systematic and Unsystematic risks6

Investing the Money in a More Effective Manner7

References8

Financial Ratios, Risk and Debt Financing considered by a Manager

Important Ratios to Be Considered

Financial ratios behave like indicators for any organizations. It basically equips the management with a tool which is efficient and help in making judgments which are useful for the organization. These ratios are not only important for the monetary benefits, but they also help them to make a better assessment of internal and external environment (Chadwick, 1983).

As a manager, I have experienced that important financial ratios are Profitability, liquidity and leverage ratios. These ratios give indicate the financial strength of the organization.

The important ratios identified by (Rushinek and Rushinek, 1995) are current ratio, return on asset, debt to equity and receivable turnover. Different studies take into account different ratios in accordance to the need and relevancy of their work.

Profitability is very important as all the organizations which are operating with an intension of earning profits are very concern about it. Return on investments is also called the business game in reality (Chadwick, 1983). This is true as it show that how well the deployed resources and performed in order to generate more profits.

Comparison of a Market Leader and a Small Business

Profitability Ratio

ABC fast-food Sept, 2012

Mc Donald's Sept, 2012

ROA

0.07771

0.06746

ROE

0.10728

0.10479

Liquidity Ratio

 

 

Quick ratio

1.13755

0.98735

Current Ratio

1.23458

1.01363

Leverage Ratio

 

 

Debt Ratio

4.10463

0.58953

Equity Ratio

4.97751

0.41047

Retrieved from: finance.yahoo.com

The above table is showing the ratios of a small organization and Mc Donald's, which is a market leader in fast food industry. ROA shows that how well our assets are performing in generating returns. More ROA is desirable, in the above table our ROA of ABC fast food is showing that its assets are deployed much more effectively and are more efficient than the asset of Mc Donald's. The same situation is with the ROEs of both organizations. ABC fast food's value is slightly high, but here the difference is not as much as the difference in the ROAs of both organizations.

Current ratio shows the ability to fulfill all the principal amount of debts. Here again, more and more value is desirable, but it may vary in accordance to the industry. Here again, ABC fast food is enjoying a better position than Mc Donald's with a difference of 0.22. Quick ratio shows ...