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BUS 5110 - Portfolio Activity Unit 7

University of the People


Financial Ratio is an imperative means of evaluating a business periodically.
They tell the health stand of an organization holistically.
According to an article, it was stressed that the critical aspect of financial analysis is
that it provides actionable insights to all commercial activity as into the organization’s
health and future potential[ CITATION Finnd \l 1033 ].

There are typically 4 broad categories of ratios as seen in the textbook “Accounting
for Managers” and they are as follows[ CITATION Heind \l 1033 ]:

1. Ratios used to measure profitability (focus is on the income statement)


2. Ratios used to measure short-term liquidity (focus is on short-term liabilities)
3. Ratios used to measure long-term solvency (focus is on long-term liabilities)
4. Ratios used to measure market valuation (focus is on market value of the
company)

In my opinion, I would say that all the above financial ratios expect with some few
lighter exemptions could evaluate the service-based industries.

1. Ratios used to measure profitability (focus is on the income statement)

1. Liquidity Ratios can be sub categorized into the following below

a. Current Ratio
b. Liquid Ratio
c. Cash Ratio
d. Operating Cash flow Ratio

These all are applicable on a service sector firm as these are associated with current
assets and liabilities. A service sector firm may or may not have fixed assets but they
do have current assets & liabilities, which are required to find out these ratios.

2. Leverage Ratios can be sub categorized into the following below


a. Debt Ratio
b. Debt-Equity Ratio
c. Coverage Ratios

These may or may not be applicable on a service provider. This reason is:
a. The service firm may not have non-current assets or liabilities
b. The firm may not have borrowed from external sources
c. Due to non-borrowed funds, no interest obligation stands.

3. Efficiency Ratios can be sub categorized into the following below


a. Inventory Turnover
b. Receivables turnover
c. Payables turnover
d. Working capital turnover
e. Fixed asset turnover
f. Total asset turnover

This ratio can’t be enforced on a service firm, as they usually don’t have any
inventory. Service is an intangible factor. Inventory of this firm may or may not exist.

4. Market Value Ratios can be sub categorized into the following below
a. Dividend Yield
b. EPS
c. DPS
d. Book value per share
e. Return on Equity

Those service firms who don’t have equity-oriented funding will not be using these
ratios.