What is Financial Ratio Analysis

Have you heard about term of financial ratio analysis? Maybe some of you that learn about financial know about this finance term. The financial ratio or sometimes they called accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise’s financial statement (Wikipedia). There are many standard ratios being used to evaluate the overall financial condition of an organization or company. Managers will use a financial ratios within a firm by the current and potential shareholders of the firm and creditors. Security analysts will use financial ratios to compare their companies strengths and weakness. For the company that has shared their trading in financial market, the price of the shares could be used in certain financial ratios.

financial ratio analysis
There’s a some of the categories of ratis that being analysis by financial ratio analysis group

Financial Ratio Analysis Categories

1. Leverage Ratios
This ratio will show the extent that debt is used in a company’s capital structure.
2. Liquidity Ratios
This ratio will give a picture of a company’s short term financial situation or solvency.

3. Operational Ratios
This ratio will use turnover measures to show how efficient a company is in its operations and use of assets.

Business Ratios and Formulas: A Comprehensive Guide
4. Profitability Ratios
This ratio Will use margin analysis and show the return on sales and capital employed.

5. Solvency Ratios
This ratio Will give a picture of a company’s ability to generate cashflow and pay it financial obligations.

There’s a problem with ratios that become useless unless there’s something to compared. You need to compare the ratios for your firm and other’s in your industry and other quarters or years of data.

Reference :- Finpipe

That’s some short description about financial ratio analysis. Hope you can get something about it and could decide whether it is important or not to have financial ratio analysis.

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