# Essay about Financial Ratios Comparison

1899 Words 8 Pages
The companies’ financial ratios can be compared with the ratios of other equivalent companies between business sectors at one point of time. These comparisons provide explanations on the relative financial status and performance of the company compared to the relative performance of its competitors. Comparisons are usually made with other companies in the same business sector and the benchmark is assumed to be the suitable value for a company. The assumption here is for the companies in the same business sector to have the almost identical financial ratios. If the ratio of a company shows a significant difference with the standard ratio, then further investigation must be done to find the cause of that difference. For evaluation, a …show more content…
Usually, the higher the ratio, the more efficient the usage of the assets. This ratio might be the most frequent ratio referred by management as it can show the overall efficiency of the company’s operations
2.9.1 Debt Ratio
Debt ratio measures the percentage of total assets that are financed by debts. Creditors prefer lower debt ratio as the lower the debt ratio, the higher the protection for their losses upon liquidation. Unlike the preference of creditors for a lower debt ratio, the management might choose a higher leverage to increase earnings. This is because they do not like to issue new equity as they fear the degree of control in the company will reduce. The higher the debt ratio, the higher the percentage of assets being funded by debts
2.9.2 Debt-equity Ratio
Debt equity ratio measures the total long-term debts for each ringgit of equity. The lower the ratio, the better it is because it shows that the total equity owned by the company exceeds the long-term debts.
2.9.3 Equity Multiplier
Equity multiplier shows the asset ownership for each ringgit of equity. Debt ratio and equity multiplier provides the same information but in different approach. Debt ratio of 40% means that the company is being funded by 40% debts. Based on the balance sheet identity: | | | | | | Asset = Liability + Equity | | | | |
From this information, we know that the company is being funded by 60% equity. Equity multiplier is 100/60

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