Understanding the Concepts - Essay Example

Understanding the Concepts Introduction: Financial ratios are determined in order to reflect on a company’s financial status. The current study focuses on the necessary ratios needed to understand the status of a small corporation and compare it with ratios required for large corporations. Financial Ratios: In regard to a small corporation it can be realized that highly sophisticated methods of financial control are not necessary. Hence financial ratios that are the basic to the need of an understanding of the financial status are applied in smaller organizations that present an analysis of the profits and debt, assets and equity status of the company.

These include the profit ratios like the Gross Profit & Net Profit Margins, Earnings per share, and Return on Assets, the liquidity ratio like the Current Ratio, and Quick Ratio, the activity ratios like the Average Collection Period, and the Inventory Turnover Ratio, and leverage ratios like the Debt Ratio, and Equity Ratio (Vickers, 2005, p.117). However, in larger corporations, besides the above mentioned ratios, certain other ratios like Accounts Receivable Turnover, Fixed Asset Turnover, Total Asset Turnover, Price-to-earnings Ratio, and Price-to-book value, to name among others (Lee, Lee & Lee, 2009, p.33). These ratios provide with further detailed analysis of a company which a small business might not require unless it is grown big.

Conclusion: The above study has reflected on the fact that financial ratios are highly significant for every organization. However, depending on the size of the organization, the need for the different financial ratios to be determined might vary. References1) Lee, A.C., Lee, J.C. & C.F. Lee (2009). Financial analysis, planning, and forecasting: theory and application, New Jersey: World Scientific2) Vickers, F. (2005). The Dynamic Small Business Manager, North Carolina: Lulu