Re: Need help with Financial Planning & Management!!
Liquidity: The
higher the ratio, the better for the business.
Industry average (if not stated) would be
2 : 1, which literally means that the firm has $2 current assets for every $1 of current liabilities. You can say something like the business is liquid and will be able to pay for its debts in the short term. Also remember that too high a ratio means that the current assets are not being used fully. The business can increase its productivity or invest somewhere else to increase its profit.
Solvency: The
lower the ratio or percentage, the better for the business.
Industry average (if not stated) would be
below 100% or lower than 1 : 1, which literally means that the firm has $1 in external debt (liabilities) for every $1 of internal debt (owner's equity). You can say something like the business is solvent, lowly geared, has a sound financial position, so this firm is in a safe position. The business is stabile and investors will be more attracted.
Profitability: The
higher the percentage, the better for the business.
There are three types of profitability ratios: gross profit ratio, net profit ratio, and return on owner's equity. The most common one in exam is return on owner's equity.
Industry average for gross profit ratio (if not stated) would be
20% - 50%
Industry average for net profit ratio (if not stated) would be
10% - 15%
Industry average for return on owner's equity (if not stated) would be
12% - 16%
Hope this helps.
