Uses of Financial Ratios

Uses of financial ratios

One of the most widely used forms of financial analysis is the use of ratios. They can provide data that is useful for investment decisions. They can also help internal management of an organization gain an awareness of their company's strengths and weaknesses. And, if we can find weaknesses, we can move to correct them before severe harm is done. While our group was looking at Nike's financial statements we were asked to look at liquidity ratios. The first ratio we examined was the current ratio. While looking at this ratio, we noticed a slight improvement to 2.8 times from a slightly lesser figure of 2.7 times before modifications. It is always good for a company to have a higher current ratio because that is the rate in which they can cover there short term creditors with assets. Seeing that Nike's current ration went up .1 times after adjustments were made signifies a small improvement over the past year. This is a small difference but none the less growth is shown and Nike's liquidity has increased. Besides it is not always good for your liquidity to increase too much over such a short span of time. Too large of an increase over such a small amount of time may mean that a company isn't really investing wisely.

The Next ratio our group looked at was the quick ratio. This ratio measures the ability of a company to pay off short term commitments with out the sale of inventories, in a way this is a variation of the current ratio. When we compared Nike's original and modified quick ratios we also noticed a slight improvement of .1. This is really saying that Nike can better pay off its liabilities without having to liquidate its inventory. It is usually in a company's best interests not to have to get rid of their inventory in order to pay off creditors because this leaves them with more assets. So by Nike's quick ratio going up they will be able to keep more inventory as compared to the last year, thus giving them more assets.

Debt ratio measures the percentage of a companies assets financed by creditors. When we Examined Nike's modified debt ratio and compared with the original ratio, we noticed that after modifications the ration decreased by 1 percent. This means that after changes were made Nike was financed less by creditors after adjustments were made. As a result of borrowing less, their