Question

Which ratios would you consider most important in the daily and monthly operation of the organization? Why? If you were analyzing an organization’s ability to borrow money, which ratios would be most helpful?

Answer 1

Ans.) Financial ratios are one of the most common most important in the daily and monthly operation of the organization at the time of decision making. A ratio is a comparison of one numbers to another—mathematically, a simple division problem. Financial ratios include the examination of different figures from the fiscal reports so as to pick up data about an organization's execution. It is the understanding, instead of the figuring, that makes money related proportions a valuable device for business administrators. Ratios may fill in as pointers, pieces of information, or red flags with respect to important connections between factors used to gauge the association's execution as far as profitability, resource utilization, liquidity, leverage or market valuation.

Leverage ratios also known as capitalization ratios would be most helpful in analyzing an organization’s ability to borrow money as it  provide measures of the firm's use of debt financing.These are critical for potential creditors, who are worried about the organization's capacity to create the cash flow important to make premium installments on remarkable debt. In this manner, these ratios are utilized widely by experts outside the firm to settle on choices concerning the arrangement of new credit or the augmentation of existing credit plans. It is additionally vital for the management to screen the organization's utilization of debt financing. The pledge to benefit outstanding debt is a settled expense to a firm, bringing about diminished adaptability and higher equal the initial investment creation rates. Consequently, the utilization of debt financing expands the risk related with the firm. Managers and lenders should always screen the exchange off between the extra hazard that accompanies obtaining cash and the expanded open doors that the new capital gives.