Implications Of Financial Ratios Related To Financial Decision Process

Ratios related to financial decision process

The table 2 below indicates three types of investment ratios and their implications. Fixed assets turnover is sometimes highly emphasized while making investment decision as it measures the relationship between fixed assets invested and profits generated, which may interest those investors and shareholders who have invested its property or fixed assets into the business and also it could be also significant to the financial manager as he may make an decision on external investment by investing the organization’s fixed assets outside.
Debt to assets ratio is a financial indicator to measure the risk of the business. It highlights an important financial message to the financial manager and shareholders
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 It shows the percentage of total assets that are financed by the creditors.
Interest cover ratio = Earnings before interest and taxes/ Interest expense  Measures the ability of the company to repay its interests on debts.
 A high ratio indicates its better ability on repayment.

Ratios related to distribution decision process
Table 4 below introduces three types of ratios related to distribution and their implications. Dividend Yield Ratio would show a general picture to the shareholders about how extent to be worthwhile to invest this company comparing with the market price. Dividend Cover Ratio is important to both shareholders and financial manager as the financial manager will need to consider whether it could benefit their shareholders.

Table 4. Distribution ratios examples and implications
Ratios related to distribution decision process Implications of the ratios Examples
Dividend Yield Ratio = (Dividend per share/ Market Price per share) X100%  How much dividends would be paid to shareholders in comparison to its market price.
Dividend Cover Ratio = Profit before tax/ Dividends  How many times the business could pay to its shareholders from its profits

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