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Financial Ratios and Bank Financing

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Financial Ratios and Bank Financing

Ratio Analysis involves measuring the proportional relationship between two single amounts. These may be selected from one financial statement, such as the statement of income, or from two statements such as the statements of income and financial position. The amounts may represent the balances of two different accounts, the balance of one account and a classification total, such as total assets, or two classification totals. In evaluating the significance of ratios, consideration must be given to the purposes for which the ratios are to be used. Investors, creditors and managers encounter different kinds of problems and decisions. Therefore, different ratios are often meaningful to each group of users within the specific decisions that are to be made. The following five categories of financial analysis ratios are the most commonly used:

Liquidity Ratios

• These indicate the ability of the company to meet its short-term financial obligations when they fall due.

Leverage-Capital-Structure Ratios

• These indicate the ability of a company to fulfill its long-term commitments to debt holders.

Profitability Ratios

• These indicate the level of profit generated by the company.

Turnover Ratios

• These indicate the efficiency of the company in utilizing its assets.

Capital – Market Ratios

• These indicate a company’s ability to win the confidence of the stock market.

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The following table...