Ratio Analysis
Ratio analysis is a tool used by bankers to study financial statements. It helps them understand the financial health of a company. It uses numbers from the balance sheet to find meaningful links. For example, a bank checks if a company has enough cash. This is done using liquidity ratios. Another important part of banking math is the Time Value of Money. This concept states that money today is worth more than the same amount later. This is because money today can earn interest.
Concepts (3)
Liquidity ratios measure how easily a company can turn its assets into cash to pay debts. The most common is the Current Ratio. It compares things the company owns (Assets) to things it owes (Liabilities).
Liquidity ratios measure how easily a company can turn its assets into cash to pay debts. The most common is the Current Ratio. It compares things the company owns (Assets) to things it owes (Liabilities). A ratio of 2 means the company has twice as much cash and goods as it has debt. This makes it a safe borrower for the bank.
Simple Interest (SI) is calculated only on the original money deposited. Compound Interest (CI) is calculated on the original money plus any interest earned in previous years. CI is common in most bank savings accounts.
Simple Interest (SI) is calculated only on the original money deposited. Compound Interest (CI) is calculated on the original money plus any interest earned in previous years. CI is common in most bank savings accounts. Example: ₹1000 at 10% for 2 years gives ₹200 in SI, but ₹210 in CI because you earn interest on the first year's ₹100.
Future Value (FV) is the amount your current money will grow into over time with interest. Present Value (PV) is the current worth of a sum of money to be received in the future. Bankers use PV to see if a future profit is worth the investment today.
Future Value (FV) is the amount your current money will grow into over time with interest. Present Value (PV) is the current worth of a sum of money to be received in the future. Bankers use PV to see if a future profit is worth the investment today. Example: If you need ₹110 in a year and interest is 10%, you must invest ₹100 today. Here, ₹100 is the PV.
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