Question

Respond to this students post!!!

The main focus as an analyst I will use in analyzing a company will be Liquidity and Profitability Ratios. When it comes to how financially health a company is operating depends on how well is the overall production. The reason I pick Liquidity is because it involves the current, quick and cash ratio. The current ratio indicates if the company can pay off its short-term liabilities in an emergency by liquidating its current assets. A low current ratio indicates that a firm may have a hard time paying their current liabilities in the short run. Which means I would look further into it to investigate where the issue is and find a resolution. These ratios measure a firm’s ability to meet its short-term obligations.

Profitability ratios are the most widely used ratios in investment analysis. Gross, operating and net profit margin places a part of measuring the firm’s ability to earn an adequate return when using profitability ratio. Increasing operating margin is generally seen as a good sign, but investors should simply be looking for strong, consistent operating margins. Overall investors would be looking for companies with strong and consistent net profit margins. This is definitely an area where I would focus because it is where the bottom line is revealed. If a company is profiting and has liquid assets, it can be analyzed on how well the company is doing in the industry and investors can develop a feel for a company’s attractiveness based on its competitive position, financial strength and profitability. As an Analyst, I will look at these two ratios.

Answer 1

To determine the financial health, the decision to analyze profitability and liquidity ratios is quite admirable. However, this will give you an incomplete picture of the company’s financial health. It is equally important to analyze solvency ratios such as debt to equity ratio, interest coverage ratio, and so on. It is very important for any organization to have debt management. With the excessive level of debt, it will be highly difficult for the business to manage rising interest levels as well as cash flows. Thus, it is essential to keep a check on solvency ratios periodically along with profitability and liquidity ratio. The efficient capital structure with a proper proportion of debt and equity allows the company to manage the cost of capital and returns.