The effective financial analysis is very important for the evaluation and the assessment of the market potential and the current position of a company. At the same time, to conduct an effective financial and market analysis it is necessary to take into consideration a variety of factors and measures including current ratio, debt ratio, profit margin, return on assets, and P/E ratio.
The current ratio is a financial ratio with the help of which it is possible to define whether a company is able to pay its debts over the next 12 months or not. The current ratio compares a company’s current assets to its current liabilities in such a way the current ratio may defined as follows:
Current ratio= current assets/current liabilities*100
Basically, the current ratio is an indicator of a company’s market liquidity and ability to meet short-term debt obligations. The acceptable current ratio may vary depending on an industry, but, in general, it is possible to estimate that if current liabilities do not exceed current assets than it is possible to state that a company has a relatively good short-term financial strength. In contrast, if current liabilities exceed current assets then it is possible to estimate that a company will likely to have problems meeting its short-term obligations.
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The debt ratio is another important financial ratio with the help of which it is possible to measure the debt of a company and to assess the extent of the debt of a company may be compared to the total assets of the company. To put it more precisely, the debt ratio compares a company’s total debt to its total assets. In such a way, it is possible to present the debt ration as follows:
Debt Ration= Total debt/Total assets*100
In such a way, on defining the debt ratio, it is possible to determine the share of the debt of a company compared to its assets. Traditionally, the position of a company is viewed as good if the total debt is lower than total assets and the lower the debt is the better perspectives a company has. In contrast, if total debt exceeds total assets it is viewed as one of the markers of a serious problem than threatens to result in a profound financial crisis a company will suffer from.
The profit margin is used to measure the profitability of a company. Basically, it is defined through the comparison of net income to net sales revenue and may be presented with the help of the following formula:
Profit Margin= Net income/Net sales revenue*100
As a rule, the profit margin is used for the internal comparison. It should be pointed out that often profit margin are quite difficult to define precisely. In fact, the profit margin is an indicator of a company’s pricing policies and its ability to control costs.
The return on assets is the measure which shows how profitable a company’s assets are in generating revenue. The return on assets is defined through the comparison of net income to total assets:
Return on Assets= Net income/Total assets*100
Basically, the return on assets is an indicator of the capital intensity of a company, which depends on an industry, since company that require large initial investments will generally have lower return on assets.
The P/E ratio of stock is a measure of a price paid for a share relative to the income or profit earned by a company per share. The P/E ratio may be defined as follows:
P/E ratio= Price per share/Earnings per share
With the help of P/E ratio it is possible to analyze market’s stock valuation of a company and its shares relative to its income.
Thus, it is possible to conclude that all the ratio and measures discussed above are very important and can provide a researcher with ample information on the financial situation in a company, though, it is still necessary to understand that in addition to these ratios it s also necessary to take into consideration the external situation in the market and a variety of other factors that can affect the performance of a company.
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