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.
This is general education only. For tax advice, speak to a qualified tax professional in your country.
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