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What are Ratio Analysis, and How is it Used?

December 11, 2020 Comments Off on What are Ratio Analysis, and How is it Used?

To know about the financial health of the company is very important. There are many factors that should be considered while analyzing and describing the health of the company. to perform this activity, ratio analysis is used. There are many types of the ratio which are used to talk about the financial health of the company.

In this blog, we will be talking about the different types of Financial Ratios and how they can help in reporting the financial health of the business.

What are Financial Ratios?

Financial ratios are numerical values that can be discovered after utilizing two or more of the different values taken from the financial statement of the company. It provides us with meaningful financial data of the company and also helps in understanding the current Leverage of the company, Margins of the company, profitability of the company, Growth of the company, and other important values of the company. These ratios help in planning for the future of the business.

The Financial ratios are divided into the following categories, which we will be discussing in detail below:

1.Liquidity Ratios

The Liquidity rates help the management to understand the ability of a company to repay loans in the short term or a long term duration. The Liquidity Ratio includes the following ratios:

  • Current Ratio
  • Acid-Test Ratio
  • Cash Ratio
  • Operating Cash Flow Ratio

2.Leverage Ratios

The leverage ratios are also known as the Solvency ratios and help the management in understanding the debt and equity in a company. These ratios help the management to understand the level of debt in the company, which in turn gives us an idea about the health of the company. The leverage ratio includes the following ratios:

  • Debt Ratio
  • Debt to Equity Ratio
  • Interest Coverage Ratio
  • Debt Services Coverage Ratio

3.Efficiency Ratios

The efficiency ratios are also known as the Activity ratios and help the management to measure the utilization of the resources of the company. This ratio helps in determining how efficiently the company utilizes all the assets and liabilities to generate maximum profits. The Efficiency Ratios include the following:

  • Asset Turnover Ratio
  • Inventory Turnover Ratio
  • Receivables Turnover Ratio
  • Days Sales in Inventory Ratio

4.Profitability Ratios

The profitability ratios help the management to understand the ability of the company to generate income in relation to the Balance Sheets, the operating costs, equity of the company, etc. The Profitability ratios include the following:

  • Gross Margin Ratio
  • Operating Margin Ratio
  • Return On Assets Ratio
  • Return on Equity Ratio

5.Market value Ratios

The Market Value Ratios of a company helps the management in understanding how he shares price / stock value should be evaluated. The Market Value Ratios include the following:

  • Book Value per Share Ratio
  • Dividend Yield Ratio
  • Earnings per Share Ratio
  • Price Earnings Ratio

By using the above-mentioned ratios, a business will be able to gauge the financial condition and accordingly prepare a strategy for the future. These ratios are mostly used to project how the company is working and to create a benchmark for the future.

These ratios offer important and valuable insights to the workings of the company and can be used by both the management of the company as well as the present and potential investors of the company. armed with the knowledge provided by these ratios, an investor can make a decision of whether to invest in the company or not.

In order to find out more about the company, and to correctly find the above ratios, the services of a professional should be utilized. The professional will have the knowledge of how to properly find out the different financial ratios of the company and will also help the management in providing a better financial picture.

If you are looking for a dedicated firm that will find the respective financial ratios of the company in the United Arab Emirates, then you must have a look at the service provided by JAXA Chartered Accountants.

JAXA comprises teams of expert professionals who will provide the best possible service to its clients. They also provide various other services that will help a company to grow and develop so that it reaches its maximum potential.

For more details on the various services of JAXA, Contact Us. We will be happy to help.