Business Financial Calculations
When a business reports their financial standings, there are numerous pieces of data that is included. What is important is how to take that financial data and utilize it to see how that information provided gives a logical representation as to how well the company is doing from different aspects. This paper will review some of these calculations such as current ratio, debt ratio, profit margin, return of assets (ROA), and price to earnings ratio or also called the P/E ratio.
The first calculation is the current ratio. This ratio is an indicator as to a company’s ability to be able to pay on their short term obligations.(Investorwords, 2008) The goal is for a company to have as high of a ratio here because that would mean that the company is easier to be able to be converted into cash; this is also known as liquid. Current ratios are calculated by taking the current assets and divide it by the current liabilities. A company is considered to have good short-term financial strength if the current assets of a company are more than twice the current liabilities. (Investorwords, 2008) If the company falls under that mark, it may be seen as having difficulties being able to meet their short term obligations.
Debt ratio is a calculation that is used to determine the proportion of debt a company has relative to its assets. This ratio allows investors to see the debt situation of a company and any risks that it may face in handling its debt. Debt ratio is calculated be taking the company’s total debt and dividing it by the total assets. It is key that a company strive to keep this ratio below a one because if it is one or greater it means that the company is carrying more debt than assets. This is a great tool in orde ...