CapitalBudgeting Techniques and Financial Ratios
Capitalbudgeting techniques and financial ratios
Whichof the available decisions metrics would be best employed in makingcapital budgeting decisions and why?
Themethod in which the company owners decide to use in investing theirmoney determines whether their organization gains profits or itloses. The management can choose depending on their firm types fromseveral capital budgeting methods. Many experts in the financialsector advice businesspersons to use net present value method due tothe merits it has over the other methods. It determines the amount ofmoney that the firm makes as a resulting of investing and the amountof cash that the company uses to make these investments (Daunfeldt &Hartwig, 2014). They recommend it as the best ways of discountingcash flows as opposed to other ways such as payback methods and theinternal rate of returns. This method assimilates all the cash flowsgenerated from the time value money and the company’s investments.It is the technique that is currently being used by manyorganizations (Shinoda, 2010). It is more common among the largebusinesses than the small ones (Uddin & Chowdhury, 2009).
Varietyof financial ratios
Thereare different types of ratios used in analyzing the company’sfinancial statements. The first on is the liquidity ratio thatdetermines the business’ capacity to deal with the money issueswhen they emerge (Delen, Kuzey & Uyar, 2013). The profitabilityratio reflects on the general accomplishments of the firm. Theactivity ratio calculates the liquidity of particular properties andthe importance of managing them. The leverage or the solvency ratiosassess the degree at which the company can finance itself using debtin comparison to its net worth (Lucic, 2014). The final ratio is themarket value ratios that provide the general information about howinvestors view the organization. Each of these ratios has a dependentrelationship with the other ratios (Tugas, 2012). Certain componentsused in calculating one ratio may also be useful in work out thevalue of a different ratio.
Daunfeldt,S., & Hartwig, F. (2014). What determines the use of capitalbudgeting methods? Evidence from Swedish Listed Companies. Journalof Finance and Economics 2(4),101-112. Retrieved from http://pubs.sciepub.com/jfe/2/4/1/
Delen,D., Kuzey, C., & Uyar, A. (2013). Measuring firm performanceusing financial ratios: a decision tree approach. ExpertSystems with A pplications 40(2013),3970-3983. Retrieved fromhttp://parsproje.com/tarjome/modiriyat/482.pdf
Lucic,L. (2014). Financial ratios in the function of business riskassessment. OnlineJournal of Applied Knowledge Management 2(3),21-34. Retrieved fromhttp://www.iiakm.org/ojakm/articles/2014/volume2_3/OJAKM_Volume2_3pp21-34.pdf
Shinoda,T. (2010). Capital budgeting management practices in Japan: A focuson the use of capital budgeting methods. EconomicsJournal of Hokkaido University 39(2010),39-50. Retrieved fromhttp://eprints.lib.hokudai.ac.jp/dspace/bitstream/2115/44167/1/EJHU_39_39.pdf
Tugas,F. (2012). A comparative analysis of financial ratios of listed firmsbelonging to the education sector in the Philippines for the years2009-2011. InternationalJournal of Business and Social Science 3(21),173-190. Retrieved fromhttp://ijbssnet.com/journals/Vol_3_No_21_November_2012/19.pdf
Uddin,M.M., & Chowdhury, R. (2009). Do we need to think more aboutsmall business capital budgeting? Internationaljournal of Business Management 4(1),112-116.