Financial Management M1 A3

Financial Ratios and Analysis

Argosy University

Abstract

This paper explains the use of ratios in order to analyze the financial stability of Gary and Company. The four types of ratios are profitability ratios, asset utilization ratios, liquidity ratios, and debt utilization ratios. These ratios have specific formulas in order to be used correctly. The ratios take information from the company’s financial statements to be used. The results of the ratios can be measured against the industry averages to determine how well the company is doing in the areas the ratios measure. Managers will be able to implement necessary changes if they know the areas in which the company is not financially strong.

Financial Ratios and Analysis

Financial ratios can be used to judge the performance of a company (Block, Hirt, & Danielsen, 2009). There are four categories of financial ratios, and they must be understand by the financial analyst in order to determine the performance of the company. The first category of ratios is profitability ratios, which include profit margin and return on assets (Block et al., 2009). The second category is asset utilization ratios, which include receivable turnover, inventory turnover, fixed asset turnover, and total asset turnover ratios. The third category is liquidity ratios, which includes the current ratio and quick ratio (Block et al., 2009). The fourth category of ratios is debt utilization ratio, which includes the times interest earned ratio. These ratios can be used to determine the performance of Gary and Company when compared to the industry averages.

Profitability Ratios

Profit Margin on Sales

Profitability ratios measure the ability of the firm to earn a profit by effectively employing its resources (Block et al., 2009). One probability ratio is the profit margin ratio, which is the amount by which revenue exceeds expenses for the company. The profit margin is found by dividing the net income by the...