Uses of financial analysis ratios
Financial analysis ratios are mathematical comparisons of different financial statement categories. They are the most commonly tools used to analyze where a business stands financially and are useful to investors as well as company management to help understand a business’s performance and identify areas that need improvement. Performing a balance sheet analysis or an income statement analysis using financial ratios is a relatively easy method to analyze data for comparing companies of different sizes and industries or getting an overall financial view of a company. There are six main categories of financial ratios. They are:
- Solvency Efficiency
- Market Prospect
- Investment leverage
Assess company financial standing with financial analysis ratios
A financial ratios analysis can be done with many different financial ratios. The following are some of the most relevant ratios:
- Liquidity Measurement Ratios – Measures a company’s ability to pay bills as they come due.
- Current Ratio – Current assets divided by current liabilities. Relationship of current assets to current liabilities
- Quick Ratio – (Current assets minus inventory ) divided by current liabilities. A more accurate method of measuring short term liquidity.
- Profitability Ratios – Measures a company’s ability to generate profits. The higher the ratios the better.
- Profit Margin Analysis – Net income after tax divided by net sales. Tells the profit per sales dollar after all expenses are deducted from sales
- Return On Assets – Net income divided by total assets.
- Return On Equity – Net income for the year after taxes divided by average stockholders’ equity during the year. Percentage of profit after income taxes earned on average common stockholders balances during the year.
- Debt Ratios – Measures a companies use of long term debt.
- Debt Ratio – Total debt divided by total assets. A ratio of 1 means debt and assets are equal, over 1 means debt is greater than assets and less than 1 means debt is less than assets.
- Debt-Equity Ratio – Total debt divided by total equity. Over 1 indicates more debt than equity, and under 1 is less debt than equity.
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