Understanding the Concepts



Understanding the Concepts

Importance of the Financial Ratios

The importance of the Financial Ratios is quite high for most of the organizations. There are several financial ratios which are calculated by the company in order to assess the performance. The common ratios calculated by the company are Current Ratio, Quick Ratio, Profitability Ratio, Return on Assets, Return on Capital Employed, Interest Coverage Ratio, and Debt/Equity Ratio etc. These ratios help to determine the financial variables of the company. In the case of large companies, some of the ratios are very important for the company. All those ratios that are related to the equity based transactions such as Price Earnings Ratio, Dividend Payout Ratio and Dividend Yield have a lot of value in this regard. Secondly, ratios such as Debt/Equity Ratio, Interest Coverage Ratio, Return on Capital Employed and Return on Assets matters for large companies. Therefore, this is the overall importance of the Financial Ratios.

Advantages and Disadvantages of Debt Financing

Advantages

The money is raised very quickly for the operations.

The payback of the company is negotiated with the help of easy terms.

The debt financing also becomes a reliable source for the company owing to the good relationship with the creditors.

Disadvantages

The debt financing poses a lot of risk because of the interest based payments.

The debt financing becomes a serious problem when the payments are not made on time.

The debt financing is always a negative psychological factor for the firms because it mentioned on the liability side of the balance sheet.

Reason of Choosing Stocks rather than Bonds

The reason because of which the company chooses stocks rather than bonds is that it a much easier option for them. The money is raised easily with the help of the stocks because of the high level of volume of transactions that occurs in the Stock Market. On the other hand, in bonds, the money is borrowed but the company is then bound to make the payments on regular basis. The difficult element is that the company needs to pay a higher amount because of the coupon rate or interest. This is not considered very favorable by the company as compare to the stock based transactions (Moreland, 1995).

Discussion of the financial returns related to risk

The financial returns have a strong relationship with the risk of the company. This is a famous quote by the economists or the financial experts that when the higher the risk, the higher the returns. When the risk is not high, the financial returns are not high. There are many firms that make a strong attempt to increase their financial returns but increase the risk as well. This is very common in the Stock Exchange transactions. The concept of the risk and the return is assessed in the Stock Market transactions. This concept is also applicable under different business transactions as well because it has always been the fundamental aspects of the Business Finance. Therefore, it is very clear that there is a direct relationship of the risk and ...