Purchasing and Financing 2024

10. FINANCIAL RATIOS
Students can calculate and interpret the results of several financial ratios.
Applying Financial Ratios and Accounting Formulas to the financial statements provides
valuable insight into the company's profitability, financial strength, and efficiency of
operations. It can then be used to evaluate both the short-term and long-term prospects
of the business.
The main Accounting Equation is the basis for understanding the financial statements:
Assets = Liabilities + Owner's Equity. From this accounting foundation, each of the
financial statement can be analysed to evaluate various aspects of the business.
When evaluating a business the following are key performance indicators of how well the
business is doing:
o The financial position and Liquidity
o Management Efficiency
o Profitability
o Growth Rates and
o Investment Returns
When evaluating the Financial Condition and Liquidity of a company the following needs
to be calculated:
For the Short-Term Financial Condition and Liquidity
o Current Ratio
o Quick Ratio (Acid Test)
o Working Capital
For the Long-Term Financial Condition and Liquidity
o Book Value
o Debt Equity Ratio
o Interest Coverage Ratio (Income Statement)
o Leverage Ratio
When evaluating the Management Efficiency of an Organisation the following needs to be
calculated:
o Accounts Receivable Turnover
o Average Collection Period
o Asset Turnover Ratio
o Inventory Turnover Ratio
When evaluating the Profitability of an Organisation the following needs to be calculated
o Gross Profit
o Profit Margin
o Net Operating Income
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