Lower the ratio, more the company is burdened by debt expenses. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. Return on Assets measures how efficient firm assets in generating profit. It is expressed in percentage. Higher the ROA, more money the company is earning on its assets.
. To ensure price stability is maintained the Reserve Bank adjust the OCR which influences prices in the economy. Price stability, which is when the purchasing power of money stays constant, is a desirable outcome of the government because inflation has several negative impacts on household and firms. Inflation erodes the values of households’ savings and causes those on a fixed income to lose purchasing power, the quantity of goods a set amount of money will buy. For firms, inflation causes cost or production to income since workers’ demand pay rises, as well as making it difficult to firms to plan for future.
Solvency Ratios This ratio used to measure the company’s ability to pay its debt indicates The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations. • Debt to Equity = Total debt Total equity AVON= -4.5 ULTA= .65 REVLON= -5.9 This ratio represent the financial efficiency being used by the company and including both short term and long term debt. A Debt to Equity ratio of 2 indicates that the company gets two-thirds of its capital financing from debt and one-third from shareholder equity, so it borrows twice funding as it owns, this ratio as benchmark shouldn’t be more than 2 to avoid higher interest expense, and in some cases could affect the company credit score. • Debt to assets = Total debt Total assets This ratio indicate that the company gets all its capital finance from debt with negative equity This ratio is comparing between the total debt and the total assets to show the company’s ability to cover its debt using its assets, ratio greater than 1 shows that a big portion of debt is funded by assets, which means, the company has more liabilities than assets AVON= = 1.12 ULTA= .39 REVLON= 1.2 Avon products company has debt more than its
It consists of all the income which causes changes in the stock holder’s equity e.g.-unrealized gains or losses, retirement investments or pension schemes, foreign currency adjustments etc. This statement helps in the future planning of the organization. Statement of Cash flows is a statement that provides information regarding the cash inflows and outflows of a business. Cash generated is categorized under three headings in the Statement of Cash flows namely Operating Cash Flows, Investing Cash Flows and Financing Cash Flows. It identifies the liquidity position of an entity and helps managers take relevant measures
The higher the quick ratio, the more the company will be able to repay its current assets without selling its long term assets. However, in case of Blackwell Automotive Company, the quick ratio is quite low which shows that the liquidity position of a company is not good. Days’ Sales Outstanding Ratio Days’ sales outstanding ratio is a ratio which measures the number of days taken by the organization so as to collect the cash from credit sales. The advantages of Days’ Sales Outstanding Ratio are: - It helps the organization to know the efficiency of the account receivable department. - It helps the investor in evaluating how fast the firm can collect the cash from its credit sales so as to pay its liabilities effectively.
There are numerous other journals like the sales journal, purchases journal, and accounts receivable journal. After collecting and analyzing the information obtained in the first step, the information is entered in the general journal, which is called the book of original entry. Journalizing transactions may be done continually, but this step can be done in a batch at the end of the day if data from similar transactions. Example Company ABC buy vehicle with cash. The
Measuring Profitability Ratios Profitability ratios measure a company’s ability to use its assets efficiently to produce profits. These ratios provide users of financial information with useful data such as how much net income is generated from each dollar of revenue and how much net income is generated per share of stock. Return on Sales
The higher is the ration, the more frequently receivables are collected by the company. ▪ The accounts receivable ratio – measures the average amount of time it takes a company to collect on its credit sales. A high accounts receivable ratio could be an indicator of the inefficient credit policy. Higher ratios mean that it takes a company longer to collect its payments. Even though the accounts receivable ratio is often a good indicator of a company's payments collecting ability, it could be misleading.
For example, if I pay a high price to purchase a bond, then a smaller percentage of what I get back counts as interest. Since I am paying more to get this bond, then less of it counts as interest. If I pay less than the face value for a bond, then the rate of return on that bond will be greater than the coupon rate. 5) If RRR (Required Reserve Ratio) is larger, is the Money Multiplier bigger or smaller? Why?
Recent evidences by economists shows that initially the long-run average cost falls rapidly but after a point it remains even or at its right end it may even slope gently downward. Joel Dean (an economist best known for his contributions to Corporate Finance theory and particularly to the area of Capital budgeting) in his cost function studies finds that long run average cost curve is L-shaped. The reasons for the LAC curve being L shaped are as follows