Understanding the Concepts

Ratio Analysis

Financial ratios are very valuable indicators for any company. I would base my analysis based on the basic ratios since the business is on a small scale. Ratio indicate clear picture of the financial performance and financial situation of the company within the industry. In short, relationship that shows something regarding the activities of the company, like ratio between the current asset of the company and its current liability or among the debtors and turnovers. On the whole, ratios can be determined from the information that is available in the financial statements. I would then compare these ratios with that of industry and major players leading the in the industry to gage my standing in the market.

Liquidity Ratios

In order to see how smoothly my company can pay its current short term obligation, I would determine the liquidity ratio of the company. This liquidity ratio furnishes information regarding the company's ability to meet the short term financial obligation. There are two type of liquidity ratios, current ratio which is the between current asset and current liabilities and quick ratio which is the between the cash, marketable securities, and receivables to the current liabilities. Inventories are the least liquid current assets of a company. Therefore, “quick ratio” is the ability to settle its obligations in the short term, to meet obligations more enforceable.

Turnover Ratios

Turnover ratios are important ratio for any company as they provide the efficiency of the company concerning their operations. Like, asset turnover ratio indicates the efficiency of the firm in utilizing their assets in profitable manner. The most common turnover ratios are receivable and inventory turnover. RTR shows the firm's ability to collect it receivables on time. ITR indicates how quickly the company is converting it product in to sales. Hence, higher these ratio, the better is for the company performance.

Financial Leverage Ratios

Leverage ratios determine how much company has invested their own money (equity) and how much is borrowed from the bank (debt). Hence, these ratios indicate the long term solvency of the company. The most commonly used leverage ratios by the companies are debt to equity ratio to see how much has been borrowed from the bank or other resources, debt to asset which shows the fraction of the asset financed through debt, interest coverage ratio which indicates the company capability to pay interest on outstanding debt payments. Hence, it shows the company's financial flexibility and stability.

Profitability Ratios

The information concerning the performance of the management in utilizing business resources is determine through profitability ratios. The common used ratios are Gross Profit Margin which states the gross profit on sales. ROA shows the effectiveness of the company in utilizing the assets in order to generate profit. ROE shows the profit that is earned for each dollar invested in the company's stock.

Debt Financing

Debt financing can be defined as a method through which businesses borrow in order to raise capital for its operations. This includes issuance of debt securities, bond or ...