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 Ratings
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| Reviewed: |
Oct 17, 2004 by Business Editorial Board |
| Overview: |
The Financial Ratios Calculator is a tool used to calculate various
ratios that help determine the financial strengths and weaknesses of a
company. Analysis of the financial statement is performed by inputting various
principal elements such as current assets, long term assets, current
liabilities, long term liabilities, sales, receivables and so forth. The
Calculator computes ten different financial ratios for gauging
a company?s profitability/operational efficiency and liquidity/solvency. A
report is produced which provides a brief explanation as to what each ratio
means. |
| Learning Goals: |
The major learning goals of the Financial Ratios Calculator are as follows:
- To serve as an introduction to basic ratio analysis and related calculations
- To apply ratio analysis to real life scenarios.
- To understand indicators of a company?s financial health
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| Target Student Population: |
The target users are college or university students taking
introductory financial accounting or finance courses. Business owners working with live data will receive some benefit from using this material. |
| Prerequisite Knowledge or Skills: |
Basic knowledge about financial statements such as the balance sheet and income
statement is recommended. The user of the material needs to be able to
distinguish between the various principal elements of financial statements. |
| Type of Material: |
Simulation |
| Recommended Uses: |
The Financial Ratios Calculator can be used as supplementary material to help
aid students when they are analyzing financial statements. |
| Technical Requirements: |
Web browser. |
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| Strengths: |
The Financial Ratios Calculator is easy to understand, very brief and to the
point. It can be used as a supplement in financial statement analysis. |
| Concerns: |
Financial Ratios Calculator does not provide a complete demonstration of the financial ratios concept. The user provides the input and then calculations are performed by the Calculator with a brief description how the ratio is used. When new data is input, the output description of the ratio on the report does not change, only the numerical calculation of the ratios changes. No
exercises are included to allow practice and feedback to ensure understanding of the concept. The learner needs to be given more information about the financial
ratios and how they are used in financial statement analysis (context).
Classification of the ratios into one of the four areas of solvency, liquidity,
operational efficiency and profitability is a bit confusing. For example, the
Return on Assets ratio has been identified as an "operating efficiency ratio" but other financial references have identified this ratio as a "profitability ratio."
The ten ratios included with this Calculator is not an exhaustive list. The financial ratios only addressed single year scenarios and exclude other popular ratios. For example, earning per share is excluded from the profitability ratios.Liquidity ratios excluded conversion of Inventory and A/R turnover to Days. The category of market performance ratios comprised of price/earnings and
dividend yield ratios was totally ommitted. Stability and growth ratios which are also important indicators of a company?s financial health are not included.
Essentially,
the calculation of the ratios available is only one component of financial statement analysis. Ratio analysis involves the comparison of ratios within a company at previous time periods, or a comparison between companies within an industry as well as between companies from different industries. The way the ratios are interpreted is too simple and general. It may lead students
specializing in finance or accounting to miss the basics about ratio analysis, that is ratios can not be studied in isolation with absolute rule of thumb comparisons. For example, a current ratio of 2 is not always good or satisfactory.
It depends on industry. In the financial sector, a current ratio of more
than 1 is consider quite adequate.
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Potential Effectiveness as a Teaching Tool |
Rating:     |
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| Strengths: |
The Calculator can be used as a tool to calculate the 10 ratios related to
profitability / operational efficiency and liquidity / solvency. It can be
included for use along with an assignment which requires analysis of financial
statements. |
| Concerns: |
Financial Ratios Calculator cannot be used as a stand-alone module for student learning. Context around the calculation of these financial ratios is an important prerequisite that the instructor must provide. Expert interpretation of results, comparative year analysis, and some popular ratios are missing from the product. Learning objectives do not exist. |
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Ease of Use for Both Students and Faculty |
| Rating: |
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| Strengths: |
The module is easy to use, visually appealing, and somewhat user friendly. |
| Concerns: |
- The instructions should indicate where the input data originates (either the income statement or the balance sheet).
- Although using this module is intuitive some simple instructions for navigation should be provided.
- Interactivity is minimal. For example, when data is
input and the Calculate icon is clicked,
no response is generated from the
Calculator to indicate that any data processing has occurred. It is not until the user clicks on the View Report icon that one realizes a report has been generated.
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