Figure 5.9
4 Financial risk
Using either total liabilities/total assets or total liabilities/shareholders' funds will indicate the degree of financial risk within the capital structure of the organisation. Most organisations run of around 50% liabilities and 50% equity, resulting I in answers of '50%' for the first ratio and '100%' for the second ratio. Banks are much higher, due to regulatory controls and backup, while mining companies run at around 0% until they have actually begun to produce. Thus, an understanding of the industry and industry standards is important in assessing this ratio.
Overall
These six or seven ratios will provide the essence of the strategic financial analysis—not a lot to calculate, really! It is also helpful to remember the following relationship:
Strategy @ work 5.2