Analysis of Financial Ratios

Financial statement analysis seeks to evaluate management performance in several important areas including profitability, efficiency, and risk. Analysts use financial ratios because numbers in isolation typically convey little meaning. For example, knowing that a firm earned a net income of $100,000 is not very informative unless we also know the sales figure that generated this income and the assets or capital committed to the enterprise. The ratios are intended to provide meaningful relationships between individual values in the financial statements.

Internal liquidity ratios:

current ratio:

                       it exams the relationship between current assets and current liabilities as follows

current ration = current assets/current liabilities

Quick ratio:

                      some believes that inventories and some other current assets might not be very liquid, so they prefer the quick ration which is as follows

quick ratio = cash + marketable securities + receivables / current liabilities

Cash ratio:

cash ratio = cash and marketable securities / current liabilities

Receivable turnover:

receivables turnover = net annual sales / average receivables

it is useful to analysis the quality (liquidity) of the  accounts receivables by calculating how often the firm's receivables turn over, which implies an average collection period.