Financial Ratios Finance Paper - 550 Words

Financial Ratios Finance Paper (Other (Not Listed) Sample) Content: Financial RatiosName:SubjectDate of Submission According to Gibson (2009), the return on equity measures how organizations generate income from new investments. Higher ratios imply that the organization is performing effectively while poor ratios imply that the organization is performing poorly. The return on equity ratio for plume is 0.13 while the return on equity ratio for the Arrow is 2.15. It follows that Arrow is generating income from new investment better than plume.The return on assets measures the number of cents acquired for every dollar asset (Leach, 2010). Thus, higher return on assets indicates profitability. The return on assets ratio for plume is 0.19 while the return on assets ratio for the Arrow is 1.22. It follows that Arrow generates more income per a dollar of asset than Plume.The gross margin ratio measures the amount of income generated for every dollar of revenue spent. It is notable that higher gross margin ratios indicate good performance whi le lower profitability ratios indicate poor performance (Moyer et al., 2009). The gross margin ratio for plume is 0.45 while the gross margin ratio for the Arrow is 0.41. It follows that Plume generates more income per a dollar of revenue than Arrow.Inventory turnover ratio identifies the days taken by an organization to dispose the average balance of inventory (Gibson, 2009). Lower inventory turnover ratios are effective. However, companies must ensure that their inventory is not exhausted implying too low inventory turnover ratios are problematic. The gross margin ratio for plume is 4.71 while the gross margin ratio for the Arrow is 5.86. Thus, that Plume generates more income per a dollar of revenue than Arrow.The collection period identifies the time taken to collect created receivables. Simply put, it is a measure of sales collection efficiency. Therefore, lower collections periods imply an organization converts sales into cash quickly (Moyer et al., 2009). The collection perio d for plume is 45.42 while the collection period for the Arrow is 33.22. It follows that Arrow converts its sales to cash faster than Plume.Fixed assets turnover ratio applies in identifying cash that is tied in fixed assets. A higher ratio indicates that a little cash is tied up in fixed assets per dollar unit of sales (Gibson, 2009). The fixed assets turnover for plume is 1.87 while the fixed assets turnover for the Arrow is 2.46. It follows that Arrow has little money tied up in assets than Plume.Debt-to-Assets ratio explains the financial advantage of an organization. Simply put, it explains the percentage of assets that are financed by debt (Leach, 2010). A higher percentage indicates more risk, which implies lower debt-to-assets ratios are preferred. The debt-to-Assets ratio for plume is 0.39 while the debt-to-Assets ratio for the Arrow is 0.42. Therefore, Plume is at risk of failing to pay debts than Arrow.The debt-to-equity ratio measures the amount of assets that are financ ed by shareholders equity and debt (Moyer et al., 2009). Therefore, lower debt-to-equity ratio translates to lower risks. The debt-to-equity ratio for plume is 0.67 while the debt-to-equity ratio for the Arrow is 0.73. Consequently, Arrow is at risk of failing to pay debts than Plume.The current ratio measures a business ability to pay its short-term debts (Leach, 2010). Therefore, higher ratios are better than lower current ratios because they indicate the organization is capable of meeting short-term obligations. The current ratio for plume is 1.41while the current ratio for the Arrow is 2.49. As a result, Arrow is likely to pay its short-term debts than Plume.Lastly, the acid test ratio measures the ability of a company to pay it current liabilities using current assets, implying hig...