Financial Resources Mgt Assignment Essay Example | Topics and Well Written Essays - 2250 words

Financial Resources Mgt Assignment - Essay Example Categories of Financial Ratios The Financial ratios are divided into various categories, each identifying a key perspective of the business of the company. Liquidity ratios performance/activity ratios Activity ratios how well the facilities at the disposal of the concern are being used. The ratio is usually calculated on the basis of cost of sales. Gearing/Investment ratios These are of two types. Capital based ratios and Income based ratios. Capital based ratios establish the relationship between the capital provided by proprietor and the other sources of funds whereas income based ratios establishes the relationship between the total revenue of the company its financial charges. Profitability ratios It is used as a performance meter of the company. Models for predicting financial distress There are two kinds of models in practice in the financial world. Univariate models of distress predictions. Multivariate models of distress predictions. Univariate model A univariate model makes use of a single ratio for predicting financial distress of any firm or company. The basis of predicting whether a firm is experiencing financial distress or not depends upon the following element. The average ratio of the non distressed firms will differ from the average of the same ratio of distressed firms. The difference shall be used for predicting financial distress of the firm. Multivariate model Multivariate model uses various ratios at a time to work out a certain figure on which the prediction is based upon. Most multivariate models uses a specific formula which gives out a figure which tells us whether the firm or company is in non distress zone, or distressed zone. The analysis of the figure on which the decision is made varies with... Financial ratios are helpful in finding the performance of the company immediately. It uses key figures from the financial statements and analyses by comparing the results of the ratios to the ratios of a successful business corporation. These are of two types. Capital based ratios and Income based ratios. Capital based ratios establish the relationship between the capital provided by proprietor and the other sources of funds whereas income based ratios establishes the relationship between the total revenue of the company its financial charges. Multivariate model uses various ratios at a time to work out a certain figure on which the prediction is based upon. Most multivariate models uses a specific formula which gives out a figure which tells us whether the firm or company is in non distress zone, or distressed zone. The analysis of the figure on which the decision is made varies with the size of the company and the business which is carried out. Likewise univariate models of predicting financial distress, multivariate models chooses a point of score which is then compared with the score of the company calculated on the basis of a formula. Scores above the point are considered indicating a financially safe company while the score falling below the point is considered indicating a financially distressed company. The score calculated through the formula is known as Altman's Z score.