Financial Ratios
Wednesday, January 14, 2009
Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance.A good financial analyst will build in financial ratio calculations extensively in a financial modeling exercise to enable robust analysis. Financial ratios allow a financial analyst to:
- Standardize information from financial statements across multiple financial years to allow comparison of a firm’s performance over time in a financial model.
- Standardize information from financial statements from different companies to allow an apples to apples comparison between firms of differing size in a financial model.
- Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial model.
In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are:
- Performance ratios
- Working capital ratios
- Liquidity ratios
- Solvency ratios
These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following questions or concerns:
Performance ratios:
- What return is the company making on its capital investment?
- What are its profit margins?
Working capital ratios
- How quickly are debts paid?
- How many times is inventory turned?
- Can the company continue to pay its liabilities and debts?
- What is the level of debt in relation to other assets and to equity?
- Is the level of interest payable out of profits?
Labels: accounting
posted @ 1:49 PM,
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