Ratio analysis is performed either using one item or different items present in financial statements. A company’s performance is calculated using this analysis. The different performance sectors are liquidity, efficiency, solvency, and profitability. Ratio analysis can examine the performance of a company.
Ratios are used to compare companies. They measure companies today against the historical numbers. A good idea about ratios can offer you a comprehensive approach from various angles and you can spot the potential demerits.
What are the Different Financial Ratios?
There are different financial ratios, which are used in ratio analysis. These are grouped under the categories that are discussed in our Ratio Analysis homework help service:
Liquidity ratios: Liquidity ratios can measure the ability of companies to meet their debt obligations with current assets. If companies cannot pay their debts, they can convert assets into cash. This money is used for settling debts. The commonly used liquidity ratios are the cash ratio, quick ratio, and current ratio. These ratios are used by creditors, banks, and suppliers to find out whether clients can meet their financial obligations.
Solvency ratios: These ratios measure the long-term financial ability of a company. the ratios can compare the debts of a company to equity, assets, and annual earnings. Some of the important solvency ratios are debt ratio, debt-capital ratio, and interest coverage ratio. They are used by banks, governments, institutional investors, and employees.
Efficiency ratios: These ratios can measure the performance of a company using the assets and liabilities. They are important as when there are improvements in efficiency ratios, a company can generate more profits and revenues. The important efficiency ratios are inventory turnover, asset turnover ratio, fixed asset turnover, working capital turnover, and receivables turnover ratio.
Profitability ratios: They measure the ability of a business to earn profits compared to their expenses. If there is a greater profitability ratio compared to the earlier financial period, it means the business is doing well financially. Some examples of profitability ratios return on assets, return on equity, gross margin, profit margin, and return on capital employed.