Question

B. Financial Ratios Select two financial ratios, described by Gallagher (2013c), which could be of value to a project manager in assessing the health of his/her organization with respect to its ability to initiate a new project or continue funding an existing project. Explain why the ratios would be useful and what information the project manager could glean from each ratio.

Financial and strategic management of project

Answer 1

Two financial ratio explained by Arthur j Gallagher which could be used by financial manager for assessment of health of organisation are-

1. Current Ratio- It is a ratio which tells about companies ability to repay it's short term periodic repayments due. It is a ratio of current assets to current liabilities and it reflects that how can company can use it's current assets to satisfy it's debts. It can be used by managers to find the Liquidity of existing projects and company abilities to repay it's short terms liability.

The more the current ratio, the better is for the company as it is left with more liquidity .

2.ROCE- Return on capital employed is Return of the capital which has been employed by the company and it reflects how efficiently the company is able to use the capital and maximize it's operating profits. A higher ROCE reflects s higher efficiency in utilisation of capital while a lower efficiency reflects that the profits are not as much as employment of overall capital. It is reached at dividing operating profits by capital employed to arrive at a ratio.

It is shown as a value which is returned to the shareholders of the company and a ROCE twice to the Interest rates are always preferable.