Dr. John Psarouthakis, Executive Editor, www.BusinessThinker.com. Founder and former CEO, JP Industries, Inc, a Fortune 500 industrial corporation. Adjunct professor, Strategy and Acquisitions, Ross School of Management, University of Michigan.
This is the 6th of short articles of my thoughts about Leading and Managing winning companies.
Analysis Framework: Financial
Financial ratio analysis will review, in part, the health and strength / weakness of the company and help decide the strategic direction of the company. The ratios such as: Liquidity, Leverage, Activity, and Profitability are basic to the analysis. To determine the risk in the company, the above ratios do not provide a measure directly. These ratios are descriptive and not prescriptive. We’d need to look at the “degree of operating leverage” and the degree of “operating leverage”. The product of these two ratios is the “degree of total leverage” which measures the company’s overall risk.
Evaluating the above sets of ratios to determine the operational and financial health of the firm an d project into the future the strategic set of ratios for a healthy growth.
In the final analysis decisions will be made, essentially, as to the direction of the business / company: the choice will be in determining the most desirable direction for and by its owner(s): i.e. Current direction with as much improvement as possible; Chart a new direction considerably different from the current one; Consideration of a strategic merger, or sale of the company to a financial group.