Essay About Calculation Of Financial Ratios And Essay Calculation Of Financial Ratios

Calculation of Financial Ratios for Google
Join now to read essay Calculation of Financial Ratios for Google
The company that I have selected for Financial Ratio analysis is GOOGLE.
The Ratios that I am going to analyze are grouped under four main headings: 1) Profitability
Ratio 2) Liquidity Ratio 3) Debt Ratio 4) Market Ratio
1. Profitability Ratio – Profitability ratios measure the firms use of its assets and control of its
expenses to generate an acceptable rate of return.
a. ROE – Return On Equity – Measures the rate of return on the ownership interest
(shareholders equity) of the common stock owners. ROE is viewed as one of the most
important financial ratios. It measures a firms efficiency at generating profits from every
dollar of net assets (assets minus liabilities), and shows how well a company uses
investment dollars to generate earnings growth. ROE is equal to a fiscal years net income
divided by total equity expressed as a percentage.
b. ROI – Return On Investment – Is the ratio of money gained or lost on an investment relative
to the amount of money invested. ROI is used to compare returns on investments where
the money gained or lost — or the money invested — are not easily compared using
monetary values. ROI is a measure of cash (or potential cash) generated by an investment,
or the cash lost due to the investment. It measures the cash flow or income stream from
the investment to the investor. Cash flow to the investor can be in the form of profit,
interest, dividends, or capital gain/loss. Capital gain/loss occurs when the market value or
resale value of the investment increases or decreases. Cash flow here does not include the
return of invested capital.
2. Liquidity Ratio – Liquidity is a measure of the ability of a debtor to pay their debts as and when
they fall due. It is usually expressed as a ratio or a percentage of current liabilities. Hence,
Liquidity ratios measure the availability of cash to pay debt.
a. Current Ratio – The current ratio is a financial ratio that measures whether or not a firm
has enough resources to pay its debts over the next 12 months. It compares a firms
current assets to its current liabilities. The current ratio is an indication of a firms market
liquidity and ability to meet creditors demands. Acceptable current ratios vary from
industry to industry. If a companys current assets are in this range, then it is generally
considered to have good short-term financial strength. If current liabilities exceed current
assets (the current ratio is below 1), then the company may have problems meeting its
short-term obligations. If the current ratio is too high, then the company may not be
efficiently using its current assets.
3. Debt Ratio – Debt ratios measure the firms ability to repay long-term debt. Debt ratios
measure financial leverage. It is the ratio of Total Liabilities to Total Assets
4. Market Ratios – Market ratios measure investor response to owning a companys stock and also
the cost of issuing stock.
a. P/E Ratio – Price to Earnings Ratio – is a measure of the price paid for a share relative to
the annual income or profit earned by the firm per share.[2] A higher P/E ratio means that
investors are paying more for each unit of income. It is a valuation ratio included in other
financial ratios.
b. Payout Ratio – Dividend payout ratio is the fraction of net income a firm pays to its
stockholders in dividends. Dividend payout ratio= Dividends/ Net Income for the same