Portfolio and Risk Management

1). Describe and summarize the financial ratios used to analyze a company.

There are a wide range of financial ratios that are often deployed in the analysis of financial statements. These are inclusive of, but they are not limited to; profitability ratios, financial leverage ratios, liquidity ratios, etc. Whereas profitability ratios (such as ‘return on equity’ and ‘return on assets’) come in handy in the assessment of the firm’s success in profit generation, financial leverage ratios (such as ‘debt-to-equity ratio’ and ‘debt ratio’) are crucial indicators of a company’s long-term solvency (Melicher and Norton, 2019). On the other hand, liquidity ratios (such as ‘cash ratio’ and ‘current ratio’) could help in the assessment of the ability of a business enterprise to cover short-term financial obligations (Melicher and Norton, 2019).

2). What is the goal of financial accounting?

The main goal of financial accounting, as Graham (2020) point out, is the presentation of a business’ accounting information in formats that are meaningful to diverse users (especially external users) such as investors, government regulatory agencies, creditors etc. This could be accomplished via the utilization of the relevant financial statements, with the information in this case capturing a specific time period, i.e. one financial year.

3). Assume you are interested in assessing a firm's profitability and level of debt, which financial statement(s) would you use?

The financial statements that would come in handy in one’s assessment of the profitability as well as debt level of the company are the income statement and the balance sheet. For instance, in the computation of return on equity (a profitability ratio), one would ordinarily need the net income (to be found in the income statement) and shareholder equity (to be found in the balance sheet). On the other hand, to compute debt-to-equity ratio (a financial leverage ratio), one would need total debt and total assets (both are found in balance sheet).

4). How are financial strategy and financial plans linked together?