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It is used to assess the 'operating' profit of the business. It is a rough way of calculating how much cash the business is generating and is even sometimes called the 'operating cash flow'. It can be useful because it removes factors that change the view of performance depending upon the accounting and financing policies of the business.
The accounting rate of return, also known as average rate of return, or ARR, is a financial ratio used in capital budgeting. [1] The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return.
As explained above, the return, or rate or return, depends on the currency of measurement. In the example given above, a US dollar cash deposit which returns 2% over a year, measured in US dollars, returns 12.2% measured in Japanese yen, over the same period, if the US dollar increases in value by 10% against the Japanese yen over the same period.
A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting , there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization.
Profit is a simple, yet powerful calculation that tells you whether your business is viable in the long run.
Probability of default (PD) is a financial term describing the likelihood of a default over a particular time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations. [1] [2] PD is used in a variety of credit analyses and risk management frameworks.
A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible. Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values. [6]
However, an acceptable range for the current ratio could be 1.0 to 2. Ratios in this range indicate that the company has enough current assets to cover its debts, with some wiggle room.