Finance, Accounting, and Banking

Finance, Accounting, and Banking

Financial information and ratios are critical to any investor.  The different ratios, together with the business information, may give a clear picture of the actual position of the company and where the company may be in a given number of years.  Among the different ratios, the profit margin ratios, inventory turnover, and the debts to total assets ratios as the three ratios are most important in determining the preferred investment. The average collection period, quick ratio, and receivable turnover, on the other hand, are the least important in determining the preferred type of investment.

The profit margin ratio is essential since it gives any investor vital information on the profit that a company gains from sales. Despite a large number of sales, the ratio aids one determining the actual profit, which investors must be keen on before investing. Inventory turnover importance in investments is the fact that it gives information on the number of times that a company has sold and replaced its inventory (Rusdiyanto et al., 2019). Demand is key to any viable company’s future. The need for a product is exhibited by stock being sold and replaced is crucial to any given investor.

Debt to total assets ratio is also a critical ratio before investing. The ratio gives information on a company’s financial leverage. One understands better the level of assets in a company that was financed by creditors. With better information, one may know whether an entity may come into a position of bankruptcy shortly (Liang et al., 2016). A higher debt to asset ratio will be bad for any given investors. Thus, the three financial ratios are the most important when it comes to determining a preferred investment.

The average collection period seems less critical since it only gives information on the amount of time between credit sales and the date when the company receives the sales (Khan, 2020). The crucial information, in this case, would have been the accounts receivables. As long as the customers pay for the goods, then the average collection period will have less impact on one choosing the preferred investment. The quick ratio is also less critical since most investors will tend to check on whether the company fulfills its long term and short term liabilities eventually. Receivable turnover also has less importance when it comes to choosing a preferred investment. Receivable turnovers show the efficiency of a company to collects its debts. Debt collection measures that can change over time and hence have no impact when it comes to choosing a preferred investment.

In conclusion, accounting ratios are vital to any investor. However, we have ratios that are of more importance compared to the others when it comes to making the right financial decisions.

References

Kahn, M. J., & Baum, N. (2020). Basic Accounting and Interpretation of Financial Statements. The Business Basics of Building and Managing a Healthcare Practice (pp. 13-18). Springer, Cham.

Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561-572.

Rusdiyanto, R., Agustia, D., Soetedjo, S., Septiarini, D. F., Susetyorini, S., Elan, U., … & Rahayu, D. I. (2019). Effects of Sales, Receivables Turnover, and Cash Flow on Liquidity.