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 about how the financing comes from and how much debts the company will need to pay back in the future. It is also important to the borrowers those lend out their money to the business. However, it does not show the capacity of the business to pay back their debts. Similarly, fixed Assets to long-term liabilities ratio, another important indicator of finance, is crucial to the shareholders and managers as it enable them to assess the ratio of its debts and assets to make decisions if they would like to sell its assets to pay off its back. It is also important to the creditors as if there is no assets left in that company, they are not able to get their money back. Table 2. Investment ratios examples and implications Ratios Implications of the ratios Examples Fixed Assets Turnover = Net Sales/Fixed Assets How efficient the company use its fixed assets to generate profits. A higher fix asset ratio indicates a higher level of ability to generate revenues by investing on fixed assets. Debt to assets ratio = Total liabilities/Total Assets Measuring the proportion of the assets in the company that are being financed by debt rather than equity. Risky for the business if the ratio greater than 1 would indicate that the business Fixed Assets to Long-Term Liabilities Ratio = Fixed Assets/ Long term Liabilities To measure the solvency of the business. Indicates whether the fixed assets in the company could cover its debts. A bigger number is better. Table 3 below introduces …show more content…
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
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 about how the financing comes from and how much debts the company will need to pay back in the future. It is also important to the borrowers those lend out their money to the business. However, it does not show the capacity of the business to pay back their debts. Similarly, fixed Assets to long-term liabilities ratio, another important indicator of finance, is crucial to the shareholders and managers as it enable them to assess the ratio of its debts and assets to make decisions if they would like to sell its assets to pay off its back. It is also important to the creditors as if there is no assets left in that company, they are not able to get their money back. Table 2. Investment ratios examples and implications Ratios Implications of the ratios Examples Fixed Assets Turnover = Net Sales/Fixed Assets How efficient the company use its fixed assets to generate profits. A higher fix asset ratio indicates a higher level of ability to generate revenues by investing on fixed assets. Debt to assets ratio = Total liabilities/Total Assets Measuring the proportion of the assets in the company that are being financed by debt rather than equity. Risky for the business if the ratio greater than 1 would indicate that the business Fixed Assets to Long-Term Liabilities Ratio = Fixed Assets/ Long term Liabilities To measure the solvency of the business. Indicates whether the fixed assets in the company could cover its debts. A bigger number is better. Table 3 below introduces …show more content…
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