Industry Averages and Financial Ratios Paper
FIN/370

RUNNING HEAD: INDUSTRY AVERAGES AND FINANCIAL RATIOS 2 ACME is looking for a bank loan to provide it with increased capital for its heater business. When deciding whether or not a company, like ACME, is financially healthy and would provide a return on the invested capital there are many tools available. By using a company’s financial statements, such as their balance sheet, we can get a small view of the heath of said business. Now by applying financial ratios and measurements towards the balance sheet, we can view the bigger picture which allows us to make a decision with far less risk in the end.
First and foremost, let's discuss each ratio expressed on these financial statements as to better understand the context of how we use them to make decisions in the modern business environment. The current ratio measures the proportion of current assets to current liabilities, with this comes a rough measurement of a company’s financial health by giving us an idea of its ability to pay back its liabilities with its assets.. The acid test, or quick ratio, is a measurement designed to show a company’s ability to use cash assets to pay for short-term liabilities. Where the debt ratio measures the total debt of a company to its total assets allowing us to see what proportion of assets are financed by debt. Times interest earned is a ratio which shows us a company’s effectiveness in meeting its debt obligations, this is done by dividing the EBIT by the total interest on all contractual debt including bonds. Average collection period is fairly self explanatory ratio, it measures the average collection period for a firm's sold assets in days. Where as Inventory turnover ratio is the amount of time a company takes to sell