Unit 2 Essay Example | Topics and Well Written Essays - 500 words - 2

Unit 2 - Essay Example (CFA, 2009) II. There is no single or correct value for a ratio. Normally, the ratio value may be too low or too high in comparison to reference value. Ratios can therefore mislead especially when they are not combined with economic need and management of the company. Therefore, one must consider the products, competitors and the vision of the company. III. It is generally hard to define the goodness- appropriateness of the ratio or its badness. Ordinarily, high cash ratio is historically classified and may be interpreted as a good sign especially when the company is growing, but could also interpreted as a sign that the company is no longer a growth company. V. The inflation also changes companys balance sheet hence affecting the profits accrued from the organization. Therefore, a ratio analysis of one company over time or a comparative analysis of companies of different ages must be scrutinized with understanding (CFA, 2009) I. Free cash flow is the amount of cash that a firm has in the bank at any given time, after all of its bills and payables are accounted for. It is determined on a daily, weekly, monthly, or yearly basis. Free cash flow is given by the total cash flow or the earnings with noncash charges added back in, minus capital spending. II. Free cash flow is important in the progress of any business because an excellent indicator of the strength of the marketplace. It normally focuses on the ability to pay bills and the remaining cash invested in growth and expansion projects. It is vital in assessing financial health of the company because it strips away all the accounting assumptions built into earnings III. Free cash flow is vital and it represents the operating cash flow after interest, the cash taxes, and normal capital expenditures. This is the cash flow that is available to a firm or a company used for dividends, debt repayment or the acquisitions of a new business. Investors use free cash flow in