When would a business financial manager use risk/return ratio?
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| Papers (9) | Insight |
|---|---|
68 Citations | Practical implications - – Firms that use sound risk management practices obtain higher valuations, achieve better financial performance and experience diminished costs of financial distress. |
01 Jul 2016 33 Citations | This study recommends managers of manufacturing companies to focus more on financial ratios that have significant relationship with stock return for more profits and less debts, future research is also recommended to examine this relation in other sectors and to use other financial ratios. |
| In contrast to asset pricing research where the book rate of return is viewed as positively associated with risk and expected stock returns, the paper demonstrates the opposite: With the effect of conservative accounting, a lower book rate of return indicates higher risk and a higher expected return. | |
19 Citations | Our empirical findings suggest that the degree of operating leverage and intrinsic business risk explain a large portion of the variation of excess return in dollar when firm's sales are negatively correlated with the market portfolio. |
| In order to stabilize risk across the business cycle, we propose a dynamic strategic asset allocation approach, which has the potential to enhance expected return as well. | |
120 Citations | When this ratio is large, the risk depends on the current amount of the company's wealth. |
| Past returns positively impact return expectations and risk tolerance, and negatively impact risk perceptions. | |
26 Citations | Recent evidence shows that a strong risk management function, compatible with the appropriate business model and culture, can restrain tail risk exposures at financial i... |
128 Citations | The optimal benefit to risk ratio can be achieved by understanding the rationale for its use and following practical management guidelines. |
Related Questions
What is the most important financial ratio in finance and accounting?5 answersThe most important financial ratio in finance and accounting is not explicitly mentioned in the abstracts provided. However, the abstracts do mention several financial ratios and their significance in evaluating performance and financial conditions of businesses. For example, the abstract by Pražák and Stavarek states that profitability and debt ratios are the most important business factors from the perspective of their impact on stock prices. Additionally, the abstract by Cincinnati highlights the importance of liquidity ratios in measuring an organization's ability to pay current liabilities with its most liquid assets. While these abstracts provide insights into the importance of different financial ratios, they do not explicitly identify a single ratio as the most important in finance and accounting.
How do financial ratios affect a company's financial performance?5 answersFinancial ratios have a significant impact on a company's financial performance. Liquidity ratios, such as the current ratio, affect the return on equity (ROE). Solvency ratios, like the debt to equity ratio, also have an impact on ROE. Activity ratios, such as inventory turnover and total asset turnover, influence ROE as well. Additionally, the firm size and leverage ratio have been found to have significant relationships with financial performance. However, it is important to note that the impact of financial ratios on financial performance can vary. Ratios that incorporate information that is difficult to predict, such as leverage or allowance accounts, are more likely to affect a company's stock price. On the other hand, ratios that contain information readily available from other sources may have less of an effect.
How does finance ratio impact performance?4 answersFinancial ratios have an impact on a firm's performance. The use of financing decision ratios, such as total debt to total assets and short-term debt to total assets, has been found to have a significant and negative effect on return on assets and return on equity. On the other hand, long-term debt to total assets has a significant and positive impact on both return on assets and return on equity. Financial ratio analysis, including liquidity, solvency, activity, and profitability ratios, helps determine whether a company's financial performance is good or not. Ratios that incorporate information that is difficult to predict, such as leverage or allowance accounts, are more likely to affect a stock's performance, while those that contain readily available information have less of an effect. Cash flow ratios have been found to be a better tool for assessing corporate performance compared to accrued financial ratios, as they provide a better insight into the viability and liquidity position of a company.
Application of risk management on financial performance of a company?5 answersRisk management plays a crucial role in the financial performance of a company. By integrating risk management practices into processes, systems, and culture, organizations can identify and analyze risks, develop risk handling techniques, and monitor their progress to avoid or reduce the impact of risk on financial performance. In the banking sector, risk management is essential for evaluating various risks, including credit risks, liquidity risks, and solvency risks, which directly affect the viability and profitability of banks. Additionally, risk governance at the enterprise level and board-level control significantly impact the performance of financial and banking firms. In the context of Sharia banking, effective risk management, represented by factors such as Capital Adequacy Ratio (CAR), Operational Efficiency (BOPO), and Nonperforming Loans (NPL), influences organizational performance. Overall, the application of risk management practices is crucial for ensuring the financial stability and success of a company.
How can financial risk management be used to improve the performance of a business?5 answersFinancial risk management can be used to improve the performance of a business by effectively managing and mitigating risks. By employing techniques such as the Analytic Hierarchy Process (AHP) and logistic regression models, organizations can prioritize parameters for risk management and analyze various risk factors simultaneously. Additionally, the study of Sharia Banking Companies found that risk management, represented by Capital Adequacy Ratio (CAR), Operational Efficiency (BOPO), and Nonperforming Loans (NPL), influences organizational performance. Furthermore, the research on corporate risks and operating performance suggests that linguistic cues derived from accounting narratives can help assess risks and impact firm performance. Moreover, the study on commercial banks highlights the importance of risk management in evaluating various risks, including credit risks, liquidity risks, and solvency risks, which can ultimately affect the net income of the banks. Overall, effective financial risk management strategies can help businesses identify and address potential risks, leading to improved performance and financial outcomes.
What are some of the limitations of using financial ratios to evaluate a company's financial health?4 answersFinancial ratios have limitations when used to evaluate a company's financial health. One limitation is that financial ratios are only relevant under specific and limited conditions, making them less applicable in certain situations. Another limitation is that financial ratios do not provide a comprehensive view of a company's financial performance and can be influenced by the complexity of financial reports. Additionally, financial ratios may not take into account certain factors such as capital costs, which can affect the analysis of a company's financial health. It is important for users of financial ratios to understand these limitations and consider them when assessing a company's financial health.