Calculating financial ratios

Financial ratios are indicators of a firm's performance and financial situation. They are measures of capital, including debt to asset, current inventory, and debt to worth.

here are a number of techniques used to calculate financial ratios in cost-benefit analysis.

Financial ratios are indicators of a firm's performance and financial situation. They are measures of capital, including debt to asset, current inventory, and debt to worth.

They are derived from the information in a company's financial statements.

The debt to asset ratio is calculated by dividing the company's total liabilities by the total assets.

The debt to worth ratio is calculated by dividing a company's total liabilities by the owners' equity (worth).

The current inventory is all the finished products that are ready for sale, but haven't been sold yet.

The levels of these ratios, and the trends that they reveal over time, can be used to make inferences about a company's financial condition, its operations, and its attractiveness as an investment.

The following techniques are used when carrying out cost-benefit analysis:

Return On Investment (ROI)

The ROI is the ratio of net benefits to costs. The formula is (Benefits-Costs)/Costs.

Net Present Value (NPV)

The NPV is used to calculate and analyze the profitability of a project. The present value of cash inflow is subtracted from the sum of the discounted cash flows which are expected. NPV is used to analyze the profitability of an investment or project.

NPV compares the value of a sum of money today versus the value of that same sum of money in the future, after taking inflation and return into account. If the NPV of a prospective project is positive, then it should be accepted. If it is negative, then the project should be rejected.

Internal Rate of Return (IRR)

The IRR is the interest rate that makes net present value of all cash flow equal to zero. This is the return that a company would earn if it expanded or invested in itself, rather than investing elsewhere.

QUESTION

Question

Match the techniques used to calculate financial ratios with the information that they provide.

Drag each technique to its definition. Drag the letters on the left to the boxes on the right. Use each letter only once.

• Net Present Value
• Internal Rate of Return
• Return On Investment

Targets:

1. This calculates the profitability of a project.
2. This is the interest rate that makes net present value of all cash flow equal to zero.
3. This is the ratio of net benefits to costs.

This is the definition of Net Present Value.
If the NPV of a prospective project is positive, then it should be accepted. If it is negative, then the project should be rejected.

This is the definition of Internal Rate of Return.
This is the return that a company would earn if it expanded or invested in itself, rather than investing elsewhere.

This is the definition of Return On Investment.
The formula is (Benefits-Costs)/Costs.

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