Thursday, May 21, 2020

Financial Ratios Financial Ratio - 1202 Words

Financial Ratios In the acquisitions and mergers of companies, there are several financial ratios that are essential to consider. These financial ratios give clear pictures of the financial position of the parent company and the company that is to be acquired. The financial ratios indicate whether a company is in a financial position to acquire a new company, and whether it would be in the best interest of the parent company to acquire the new company. It is also important to note that an accurate indication of the strength of a ratio is dependent on industry average, competitors ratios and the historical ratios of the respective companies. These financial ratios are discussed below. Liquidity Ratios The first set of financial ratios to†¦show more content†¦This computation is done to determine the amount of cash that make up a company’s current assets to cover current liabilities. The goal of these ratios is to provide a clear picture of a company’s ability to satisfy short term financial obligations given that such obligations needs to be satisfies within a specific short period of time (Ahmend, 2015). Solvency Ratios The next set of ratios to consider is the solvency ratios. The solvency ratios include the debt to equity ratio, debt to asset ratio and interest coverage ratio. The debt to equity ratio is calculated by dividing the total debt of a company by the total equity of the company. When the debt to equity ratio is high, it is an indication that a company financed mostly by debt. While this may not necessarily be a bad thing depending on the size of the company a high debt to equity ratio implies that there are more interests and creditors that a company has to pay in the future. It depicts a higher risk in terms of a company’s ability to satisfy its financial long terms debts. The debt to asset ratio measures a company’s total asset against total liabilities. A higher debt to asset ratio indicates that a company has a lot more debt than it can potentially pay in the future. The interest coverage ratio measures a company’s ability to pay off interest on loans with the current operating income. It is calculated by dividing operating income by interest expense. The higher the

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