The Benefits of Understanding Financial Ratios Essay

The Benefits of Understanding Financial Ratios - Essay Example Within the questions that were considered were the specific ratios CFAs use to measure liquidity, long-term debt paying ability, and probability; and what are the relative importance of specific financial ratios. While there were sixty-ratios considered, a number of prominent points emerged. In these regards, it’s noted that a single ratio oftentimes functions to measure more than one aspect of financial health. One example is that a ratio of days’ sales measures both liquidity and profitability. In terms of the most important financial ratio, analysts placed the most emphasis on return on equity after tax. b) Specification of thesis – main point The main point thesis of the article is that financial analysis places great emphasis on the corporate annual report and the financial ratios that examine it. A further thesis is that financial ratios have a varying degree of importance in terms of a variety of financial categories, specifically liquidity, long-term debt paying ability, and profitability. c) Supporting opinions/reasons There is a great body of research that supports the notion that financial ratios are an integral part of determining a firm’s financial performance. ... al to measuring a business’ financial performance and future viability; in addition they add the DuPont Ratio as a significant financial ratio for analysis. Financial ratios have also been extended to examine the financial strength of a firm when enlisting an underwriter before an IPO; this perspective was noted by Quantitative Applications in Economics & Finance (2008). Another prominent perspective was advanced by Kaufman (1995). Kaufman (1995) considered that bank failures are oftentimes linked and anticipated by the key financial ratio of low capital-to-assets. d) Opposing opinions/reasons While there are a number of strong elements supporting these understandings of financial rations, there are also a number of opposing perspectives. One perspective, as proposed by Ming-Yuan, Meng-Feng, et all (2007), argues that instead of financial ratios, behavioral determinants of firms’ oversees financing policies function as the primary analytic criteria. This study examined behavioral factors of, â€Å"(1) persistence behavior effects, (2) mental account effects, (3) the year of the company, (4) attraction effect, (5) character qualifications of managers and (6) overseas investment effects† (Ming-Yuan, Meng-Feng, et all 2007, pg. 183) in attempting to determine financial strength. The study revealed that there were statistically significant correlations between behavioral aspects and firms’ oversees financing decisions. Even more notable, financial ratios were not influential in these decisions. Another prominent consideration was that advanced by Pantos (2008). Pantos (2008) argues that previous arguments, specifically those of Emm and Gay (2005), that high concentration ratios can demonstrate significant risk implications in over-the-counter derivatives markets are