Most companies don’t have the luxury of such huge cash surpluses, but they also park any cash that is not immediately needed in short-term investments. The market for these investments is known as the money market. The money market has no physical marketplace. It consists of a loose collection of banks and dealers linked together by telephones or through the web. But a huge volume of securities is regularly traded on the money market and competition is vigorous.

 Financial ratios are relative figures reflecting the relationship between variables, they enable analyst to draw conclusions regarding financial operations. For short-term investments, the most appropriate ratios are as follow:

Liquidity ratios, the adequate liquidity is important to help Company to meet current/short-term obligations. The short-term creditors are interested in the short-term solvency or liquidity of the Company.

Acid-test/quick ratio is one of the liquidity ratio that refers to current asset which can be converted into cash in short term without diminution of value such as cash and cash equivalents and short-term investments and accounts receivables.

Acid-test/Quick ratio = (cash and cash equivalents + short-term investment + accounts receivables)/ current liabilities

If satisfactory ratio which is equal 1 or more which gives an indication that Company can settle its current obligations by quick assets, and unsatisfactory ratio which is less than one that may lead the company to cover some unsalable inventories or give more prompt payment discount for receivables to collect the money and pay its current obligations. But too high ratio is not necessary good indicators, as long as there is no an indication in the management plan or Corporate Governance in the financial statements for plant expansion or acquiring new investments, high ratio will indicates that cash have been unnecessary accumulated and are not being profitably utilized, and the management follow conservative policy for managing cash which reflects the poor skills of the management. This ratio should be considered in relation to the industry average to infer whether the firms short-term financial position is satisfactory or not.

 The objectives of acquiring short-term investments are twofold: 1) to maximize the return on assets, and 2) to minimize the risk of loss from price fluctuations. Therefore, Company should calculate the yield of money market investments as follow.

 

a)

Future Value

xx

b)

Annual discount rate

x%

c)

 Maturity period, month

x

e)

Cash paid currently

 a - a * (c/12*b)

Yield on Money market investment

(a - e)/e

 The principle money-market instruments are summarized in the below table.

 

Investment

Borrower

Maturities when issued

Marketability

Basis for calculating interest

Comments

Treasury bills

U.S. Government

4 weeks, 3 or 6 months

Excellent secondary market

Discount

Auctioned weekly

Federal agency benchmark bills and discount notes

FHLB

Overnight to 360 days

Very good secondary market

Discount

Benchmark bills by regular auction; discount notes sold through dealers

Tax-exempt municipal notes

Municipalities, states, school districts

3 months to 1 year

Good secondary market

Usually interest-bearing with interest at maturity

Tax-anticipation notes, revenue anticipation notes, bond anticipation nots

Nonnegotiable time deposits and negotiable certificates of deposits

Commercial banks, savings and loans

Usually 1 to 3 months; also longer-maturity variable-rate CDs

Fair secondary market for negotiable CDs

Interest-bearing with interst at maturity

Receipt for time deposit

Commercial paper

Industrial firms, finance companies, and bank holding companies; also municipalities

Maximum 270 days; usually 60 days or less

Dealers or issuer will repurchase paper

Usually discount

Unsecured promissory note; may be placed through dealer or directly with investor

Banker’s acceptance

Major commercial banks

1-6 months

Fair secondary market

Discount

Demand to pay that has been accepted by bank.

 For long-term investments management, Long-term investment management is subject to investment and decision analysis for making long-term investment. And it is not fair enough to discuss this topic in this article, we will discuss about it in another article, but what we need to know that establishing plant, acquiring company has financial feasibility which compute the net cash flow, net present value of cash flow, expected monetary value for each scenario or strategies, internal rate of return, payback period, average accounting rate and profit index. Not merely, even financial ratio can help us to manage our fixed assets (long-lived assets) such as return on fixed assets investments ratio, earning power.

Return of fixed assets or average assets = Net income ÷ fixed assets or average total assets

This ratio measure how effectively company utilize its fixed assets or total assets. Means, how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base, but too high rate is not necessary good indicators, it may indicate that the Company does not have adequate assets and loss opportunity for gaining more potential profit.

Assets Turnover = Sales ÷ Total assets

This ratio is useful to determine the amount of sales that are generated from each dollar of assets, company in retail industry has with low profit margins on its products tends to have high asset turnover because of competitive pricing, and company with high profit margins on its products has low asset turnover.

The below investment evaluation ratios are some of ratios that can help the investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation.

Price-to-Earnings = Stock Price per share / Earnings per share (EPS)

This ratio is useful when you are comparing a company's current P/E with its historical P/E and to the median of industry or average of peers company. If you see a solid company rapidly growing at the same rate with about the same business prospects as the past, but now trading at a lower P/E, it is definitely worth analyzing further. But investors should take care and be aware that the earnings that is calculated in the formula is also subject to manipulation at times. For instance, the Earning could be inflated if the company just sold a business or asset recently. Also, a lower P/E doesn't necessarily mean, the share is attractive buying opportunity because the investee that is growing faster without much debt.

Price-to-Book = Stock Price per share / Equity per share

It made sense to value companies based on their accounting book value. However there are many factors that can affect this ratio such as issuing new stock, paying dividends, and stock repurchases. It is possible for a company to manipulate this ratio by various means. The price to book value ratio can likely tell investors how the market perceives the value of a particular stock to be. A ratio over one implies that the market is willing to pay more than the equity per share. A ratio under one implies that the market is willing to pay less.