Financial Management Term Paper Example | Topics and Well Written Essays - 1250 words

Financial Management - Term Paper Exampleincome tilt (Profit & Loss Account), statement of financial position (Balance Sheet) and a statement of changes in financial position (Cash Flow Statement), it is called Accounting Ratio. Accounting Ratios are very powerful analytical tools for bar procedure of a business enterprise. The basic objectives of Ratio Analysis are To forget a deeper analysis of the liquidity, solvency, profitability and activity levels of a business enterprise. To love about the potential areas that could be improved with more effort in the desired direction. To provide information for making inter-firm equality and intra-firm comparison by canvass firms performance with best in the industry figures. The advantages of using Ratio Analysis are These proportionalitys help the management to analyze past performance and also to make future projections. Interested stakeholders as shareholders, investors, creditors and governments and independent analysts can eva luate certain aspects of a business with the help of ratio Analysis. Accounting ratios provide an easy way to compare current performance with previous periods. These Ratios correctly elucidate the strengths and weaknesses of a firms operations and provide a cause insight about the financial health of a firm. Current Ratio The purpose of this ratio is to shed further light on the short-term solvency of the family and, more specifically, on its ability to pay the debts as they fall due, by calculating the relation between current assets and current liabilities. A widely utilize rule of the thumb is that a current ratio of 21 is an ideal ratio. However, such a generalization is not always true. The standard ratio leave behind vary from industry to industry and within the same industry from season to season, depending upon the rate at which current assets are converted into cash and how pronto current liabilities must be paid. The ratio cannot be accepted as adequate without consi dering the composition of its current assets and their liquidity. A high current ratio will not be a measure of solvency of business if the current assets are made up mainly of obsolete stock or debtors outstanding for a long time. The current ratio of PepsiCo is 1.44 (PepsiCo Inc., 2010) while that of Coca Cola is 1.13 (Coca-Cola Enterprises Inc., 2010). Though the current ratios of both the companies fall short of the ideal standard but considering the concomitant that both are multinational beverages giants in their own right it must be said that PepsiCo scores over Coca-Cola in this regard as it is in a better position to honor its current liabilities as and when they fall due. Profitability Indicator Ratios Profitability ratios measure a concerns breaker point of success in earning a return on sales or on investment. The rate of return on capital employed, often described as the primary ratio, relates the income earned from the companys activities to the resources employed by the company. The ratio indicates the efficiency with which the capital employed in the business is being utilized, and by comparison with other businesses it may provide a means of evaluating whether the management has the ability of to earn a reasonable income for the company with the resources at their disposal. There are a number of ways of computing rate of return on capital employed depending upon the definition of capital employed. The term capital employed is used, in accountancy to signify three different financial totals (i)