What are Financial Ratios? 

Financial ratios are calculated from one or more pieces of information from a company’s financial statements. Financial ratio analysis groups the ratios into categories which tell us about different facets of a company’s finances and operations.  In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company’s situation and the trends that are developing. 

Assignment

Give a brief definition of EACH OF the Financial Ratio Groups listed below. 

List one of the actual formula for one of the ratios in the ratio groups and how the ratio assist analyst of the company’s situation, the trends that are developing or any other relevant information on the company. 

The example above should be used as a guide to what is expected. 

Give as much detail as possible. 

1. You may utilize your class book, the internet or other resources to obtain information.
2. Leverage Ratios  
3. Liquidity Ratios
4. Operational Ratios or Profitability Ratios
5. Solvency Ratios

Asset Turnover Ratios

• Dividend Policy Ratios
• Example
• For example, the “gross margin” is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms.
• Gross Margin= Sales ost of Goods Sold
•                          Sales
• A ratio gains utility by comparison to other data and standards.  In the example, a gross profit margin for a company of 25% is meaningless by itself. If we know that this company’s competitors have profit margins of 10%, we know that it is more profitable than its industry peers which are quite favorable. If we also know that the historical trend is upwards, for example has been increasing steadily for the last few years, this would also be a favorable sign that management is implementing effective business policies and strategies.