Business Financial Metrics - Essay Example

Company managers, investors and government regulators utilize various metrics and ratios to analyze company financial statements such as income statements and balance sheets so as to determine the fiscal viability of the organization in the short and long term. This paper will examine some of the ratios and metrics utilized by various stakeholders to appraise different financial statements, examining how various stakeholders can successfully employ the metrics and ratios in their decision making.

The examination of balance sheets entails the use of financial ratios as the primary metrics. These ratios include the quick ratio, leverage or debt-to-worth ration and current ratio. The current ratio, which is also referred to as the liquidity ratio, measures the liquidity or solvency of an entity (Higgins, 2009). This metric offers investors a measure of the business’ capacity to pay its current liabilities using its current assets. Investors typically use this information to decide whether or not to invest in a business.

A high current ratio means the company has vast capabilities to pay its short-term debts using short-term cash. Investors and company managers seek a current ratio that is above 1.0 since this indicates a company’s competence to repay all its current liabilities. Secondly, quick ratio is also a measure of liquidity, which eliminates certain minimally liquid assets from the current ratio equation. Company managers, government regulators and investors utilize quick ratio to analyze a company’s financial strength (Shapiro & Balbirer, 2000).

Company managers, investors and business managers use this information to determine a company’s overall capacity to repay its current liabilities, which influences its long term viability. On the other hand, the leverage ratio or debt-to-equity or debt-to-worth ratio provides investors a viable signal of a business’ leverage. When this ratio is high, it means a company’s assets exceed its stock equity, which indicates that the company has more debt than equity. Leverage ratios of 2:1 or lower mean that liabilities are double the amount of shareholder’s equity.

Ratios above 2:1 indicate that a business may be unable to pay its creditors or acquire supplementary long-term funding (Higgins, 2009). Government regulators use leverage ratios to determine whether or not companies can legally file for bankruptcy. Investors use the ratios for control purposes such as deciding either to invest or pull out their investments in a company (Harrington, 2003). The ratios allow current and prospective investors to examine how managers acquire and make use of company resources in their control, thereby influencing investment decisions with a view to deterring the incidence of financial loss.

Through the ratios, company managers gain knowledge of the successfulness of the business’ past and present strategies and how to enhance their future viability. Ratios also enable managers to highlight and exact deviations from optimal performance levels thus allowing organizations to steer their decision making and processes towards the attainment of such optimal performance. Various stakeholders use different ratios and metrics to analyze income statements. For instance, earnings per share ratios tell government analysts and investors the amount of money available to shareholders