current ratio gives insight to the ability of a company to repay its short-term debt. This ratio should be greater than one but closer to two in order to be favorable. The quick ratio also looks at liquidity but it excludes inventory from its current assets. Therefore, this is a more conservative ratio. The debt ratio looks at the total debt as compared to total assets. For example, if a firm has a debt ratio less than 1, it has more assets then debt. However, if the debt ratio is greater than one, it means there are more debts than assets. The second category of financial ratios is the solvency ratios. These ratios look at the debt as it relates to its assets and equity. The most common solvency ratios are the debt to asset ratio and the debt to equity ratio. The debt to equity ratio looks at proportion of equity and “what debt a company is using to finance its assets” (www.investopedia.com). While debt to asset ratio looks at how much of the company’s assets have been financed with debt. The third category of financial ratios is the profitability ratios. These ratios look at the overall ability of a company to bring in a profit. The most common profitability ratios are the return on assets, the return on equity, return on sales, the earnings per share, the price to earnings ratio, and the times interest earned ratio. The return on assets ratio the profit generated “measures by one dollar of assets” whereas return on equity ratio (ROE) the profit generated by “measures one dollar of equity” and return on sales the profit generated by one dollar of sales” “measures (Hawawini & Viallet, 2011, p. 144). The best indicator of profitability of a firm is ROE because it is the most inclusive of all the decisions a firm has made over the course of the year. The earnings per share ratio is important in determining the price per share. Price to earnings ratios when high should represent higher earnings growth in the future when compared to a company with a lower price to earnings ratio. The times interest earned ratio how many times “indicates the firm’s pre-tax operating profit covers its interest expenses” (p. 152).
current ratio gives insight to the ability of a company to repay its short-term debt. This ratio should be greater than one but closer to two in order to be favorable. The quick ratio also looks at liquidity but it excludes inventory from its current assets. Therefore, this is a more conservative ratio. The debt ratio looks at the total debt as compared to total assets. For example, if a firm has a debt ratio less than 1, it has more assets then debt. However, if the debt ratio is greater than one, it means there are more debts than assets. The second category of financial ratios is the solvency ratios. These ratios look at the debt as it relates to its assets and equity. The most common solvency ratios are the debt to asset ratio and the debt to equity ratio. The debt to equity ratio looks at “what proportion of equity and debt a company is using to finance its assets” (www.investopedia.com). While debt to asset ratio looks at how much of the company’s assets have been financed with debt. The third category of financial ratios is the profitability ratios. These ratios look at the overall ability of a company to bring in a profit. The most common profitability ratios are the return on assets, the return on equity, return on sales, the earnings per share, the price to earnings ratio, and the times interest earned ratio. The return on assets ratio “measures the profit generated by one dollar of assets” whereas return on equity ratio (ROE) “measures the profit generated by one dollar of equity” and return on sales “measures the profit generated by one dollar of sales” (Hawawini & Viallet, 2011, p. 144). The best indicator of profitability of a firm is ROE because it is the most inclusive of all the decisions a firm has made over the course of the year. The earnings per share ratio is important in determining the price per share. Price to earnings ratios when high should represent higher earnings growth in the future when compared to a company with a lower price to earnings ratio. The times interest earned ratio “indicates how many times the firm’s pre-tax operating profit covers its interest expenses” (p. 152).
comprehensive_financial_analysis_of_cvs_caremark.docx