Role Of Financial Analysis Ratios For Company

financial analysis ratios

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:

  1. Liquidity
  2. Solvency Efficiency
  3. Profitability
  4. Market Prospect
  5. Investment leverage
  6. Coverage

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:

  1. 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.
  1. 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.
  1. 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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