What are Financial Ratios

Financial ratios are created with the use of numerical values

taken from financial statements to gain meaningful

information about a company.

The numbers found on a company’s financial statements, are,

balance sheet, Income and cash flow statements – are used to

perform quantitative analysis and assess a company’s

liquidity, leverage, growth, margins, profitability, rates of

return, valuation, and so much more.

Financial ratios are grouped into the following categories:

  • Liquidity ratios,

  • Leverage ratios,

  • Efficiency ratios,

  • Profitability ratios,

  • and Market value ratios.

Analysis of financial ratios serves two main purposes.

1. Track company performance.

Determining individual financial ratios per period and

tracking the change in their values over time is done to spot

trends that may be developing in a company.

For example, an increasing debt-to-asset ratio may indicate

that a company is overburdened with debt, and may

eventually be facing default risk.

2. Make comparative judgments regarding company

performance.

Comparing financial ratios with that of major competitors, is

done to identify whether a company is performing better or

worse than the industry average.

For example, comparing the return on assets between

companies helps an analyst or investor to determine which

company is making the most efficient use of its assets.

Users of financial ratios, include parties external and internal

to the company..

External users. Financial analysts, retail investors, creditors,

competitors, tax authorities, regulatory authorities, and

industry observers.

Internal users. Management team, employees, and owners.

Let's look at them one by one, to understand what they are

telling us, and how we can use this information to improve our

business.

Next Liquidity ratios. What are they? How to evaluate them ?

and how to use this information to support you to be the

greatest you can be.

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Disclaimer: The content shared on this blog and in these videos is for informational and educational purposes only. Despite my 30 years of experience as a business owner, I am not a certified financial advisor, accountant, or legal professional. The insights and tips shared are based on personal experiences and should not be taken as professional financial or legal advice. For financial, legal, or professional advice, please consult with a certified professional in the respective field. I disclaim any liability or responsibility for actions taken based on any information found in this blog or these videos.

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