Financial ratios analysis of working capital – 2 page paper
Current Ratio: The current ratio measures how easily a company can meet its short-term financial obligations by measuring the current assets of the business relative to its current liabilities. A low current ratio means that the company has difficulty covering its short-term expenses and debt payments, which could be indicative of poor billing performance.
Return on Assets (ROA): ROA measures how effectively a company uses its assets to generate profits, or returns. If ROA is low relative to other companies in the same industry or sector, this may indicate that the business’s costs are increasing faster than its revenue due to inefficient management practices such as poor billing performance.
Return on Equity (ROE): ROE looks at how well a firm utilizes equity investments from shareholders and creditors in order to generate income for them with minimal risk involved. Low ROE compared with industry averages may suggest that management does not efficiently use funds for investments which could be caused by improper cash flow resulting from poor billing operations.
Profit Margin: Profit margin evaluates overall profitability of an individual sale or total sales over time; if profit margins are declining over time despite increased sales volume then it could indicate that customer receivables are not being managed properly resulting in poor billing performance.