I have identified different types of ratios using financial information from the company named First communication plc. I have identified how these ratios help the user to understand the financial position and performance of the business.

Abubakar Habib                P6/M3

Introduction

Ratios are useful because they briefly summarise the result of detailed and complex calculation. Ratios evaluate financial condition and performance of a business concern. However ratio simply means a comparison of one figure to other relevant figure.

Ratios is used by internal stake holder such as managers, where they assess performance of individual branches, they monitor year to year performance, analyse relationships between revenues and expenses and so on. It is also, used by employees whereby they use it to negotiate wages and conditions, assess security of firm and therefore own a job etc.

It is also, used by external stakeholders such as customers and creditors. Creditors assess security of the firm and decide on credit terms offered

Liquidity ratios

Liquidity ratios provides information about the company’s short term financial circumstances, this states the extent to which a firm is able to pay off its debt therefore, it will measure whether the business has enough money to pay its bills.

current ratios =          current assets
current liabilities         = ratio

Most of the short term creditors would prefer high current ratios as it will reduce their risk. Shareholders may prefer a lower current ratio so that more of the firm’s assets are working to grow the business.

First communication plc liquidity ratio

2008                                                                                                     2009

665.1   = 2.3                                                                                         451.7 = 1.10
283.6                                                                                                 ...

Here's what a teacher thought of this essay

*** There are some good points in this essay but too many errors in facts and calculations. Without the balance sheet and profit and loss statement it is hard to see what figures should be used but there is no consistent use of the figures e.g. share capital could be 4614 or 461.4. Are these thousands, millions or just pounds?