Ratio Analysis

Ratio Analysis

“ROA, or return on assets, is a ratio that assesses how well a firm utilizes its assets to create profits. It is one of the most essential asset management ratios. An organization is able to evaluate the efficiency of its operations by calculating the ratio of their net income to their total assets. If the company’s net income was $10 million and its total assets were $100 million, then a return on assets (ROA) ratio of ten percent would be suitable for the business.”

“The ratio of a company’s debt to its equity, often known as the debt-to-equity ratio (D/E ratio), is an essential indicator of its level of financial leverage. The ratio of a firm’s debt to its equity may be used to assess whether or not the company can satisfy its financial commitments.” When an organization’s total liabilities and equity equal one hundred million dollars, the D/E ratio equals fifty per cent.

The current ratio of an organization is something that you should be aware of if you are interested in the short-term financial health of an organization. “This ratio, which can be determined by deducting a company’s current assets from its current liabilities, is a useful indicator of whether or not a business’s finances are in good shape.” If a company’s current assets and liabilities add up to a total of $30 million, for instance, the current ratio would equal 1.5.

“The D/A ratio is very important to a firm’s solvency since it measures the entire financial leverage of the organization. The capacity of a corporation to repay its long-term debt may be determined by taking the entire obligations and dividing them by the total assets”; hence, it is essential to be familiar with this ratio. In the example shown below, a corporation has a D/A ratio of 60 per cent when its liabilities are $60,000,000 and its assets total $100,000,000.

“When determining whether or not a firm will be successful at turning a profit, one crucial metric to examine is the net profit margin. By dividing a company’s net income by its total sales, this ratio provides a useful indication of the overall health of the company’s finances.” A business with a net profit margin of ten per cent would have ten million dollars in net profit and one hundred million dollars in total sales if it had one hundred million dollars.

References

Jurakulovna, J. G. (2021). The Necessity and Theoretical Basis of Financial Statement Analysis in Modern Management. Academic Journal of Digital Economics and Stability, 7, 89-95.

Fatihudin, D. (2018). How to measure financial performance. International Journal of Civil Engineering and Technology (IJCIET), 9(6), 553-557.

Robinson, Thomas R. International financial statement analysis. John Wiley & Sons, 2020.

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Three financial statements are prepared regardless of the business structure (nonprofit, private; nonprofit, public; for-profit, private; or for-profit, public):

Ratio Analysis

1. Balance sheet.
2. Income statement.
3. Statement of cash flows.

Health services managers use these statements to assess how well the leadership team manages assets, properly leverages debt and equity, maintains liquidity and solvency, and achieves profitability. This is done by examining the relationship between figures on the statements and through a process known as ration analysis. Many stakeholders, such as lenders, vendors, leadership, personnel, and the community, are interested in certain financial ratios.

There is a fourth financial statement, referred to as the statement of change in equity, which provides explanations for changes in a firm’s equity; however, it isn’t typically used in performing ratio analysis.

For this discussion:

• You are an administrative intern, and your boss, the controller, has asked you to identify one asset management ratio, debt management ratio, liquidity ratio, solvency ratio, and profitability ratio that you believe to be the most important to an organization and then prepare a brief defence of your choices.