Financial Ratio and Industry Average Essay

1385 Words Apr 15th, 2012 6 Pages
a. Why are ratios useful? What three groups use ratio analysis and for what reasons?

Financial ratios are designed to extract important information that might not be obvious simply from examining a firm’s financial statements. Financial statement analysis involves comparing a firm’s performance with that of other firms in the same industry and evaluating trend in the firm’s financial position over time.
From the textbook , we know managers use financial analysis to identify situations needing attention; potential lenders use financial analysis to determine whether a company is creditworthy; and stockholders use financial analysis to help predict future earnings, dividends, and free cash flow.

b. Calculate the 2011 current and
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Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors’ losses in the event of liquidation.

The Tie ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. Computron’s interest is covered 6.3 times. The industry average is 6.2. so the Computron is covering its interest charge by a relatively same margin of safety.

The EBITDA coverage ratio is most useful for relatively short-term lenders such as banks, which rarely make loans (except real estate – backed loans) for longer than about 5 years. Computron covered its fixed financial charges by 3.0 times. The Ratio is well below the industry average, so the company seems to have a

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