Paper Topic:

• An evaluation of the use and adequacy of the accounting rations a means of monitoring the financial health of his business

When we speak of finance , we are actually indicating the making of decisions , which is based on the figures and data provided by the accountants . So , this is where accounting ratios come in , they help financial managers in making decisions regarding key aspects of the company . These key aspects may include , financing , budgeting investments , etc

The financial manager or consultant places primary emphasis on decision making . It uses the financial statements pre pared by the accountants to make decisions about the firm 's financial condition . Ratios are guidelines to evaluate a

company 's financial position and the efficiency and effectiveness of its operations . It also enables firms to make comparisons with its competitors or the industry as a whole , or even with itself , i .e . with its own performances in the past . Ratios also act as an alarm or a siren indicating areas of concern for firms , i .e . areas requiring further investigation

Ratios are not only used by the managers that are internal members of the organisation , but creditors , investors , auditors , are common examples of outsiders or people external to the organisation who might be interested in closely examining a firm 's performance by monitoring its ratios

There are four broad categories of financial ratios , each of which is important in a different way

Leverage ratios , shows how heavily the company is in debt

Liquidity ratios , measure how easily the firm can lay its hands on cash

Efficiency or turnover ratios , measure how productively the firm is using its assets

Profitability ratios , that are used to measure the firm 's return on its investments

Leverage ratios measure how much financial leverage the firm has taken out . These ratios generally measure the firm 's ability to pay-off its debt in the long run . Banks might be interested in a company 's leverage ratio , as it gives them a fair idea of whether the firm is capable of paying-off the loan and its chances of bankruptcy . Not only do Leverage ratios impact a company 's debt financing but it may also effect its equity financing , because if after taking a loan , the company isn 't able to pay it off and gets bankrupt , shareholders are the ones who have to bear all the loss

Similarly , if one is extending credit to a customer or making a short-term bank loan , one is interested in more than the company 's leverage . One wants to know whether it will be able to lay its hands on the cash to repay the money . That is why credit analysts and bankers look at several measures of liquidity . Liquid assets can be quickly and easily converted into cash (Brealey , Myers , Marcus , 2006

Efficiency ratios are employed by financial analysts to judge the productivity and the efficiency with which a firm is operating . These ratios may also be of use to investors , as above industry average efficiency of a firm may indicate bright prospects of future growth in an enterprise

Profitability ratios are measurements that are used to...

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