A Review Of Financial Ratio Analysis – Telling A Business’s Health

A review of financial ratio analysis

A review of financial ratio analysis gives one a better understanding of what such a ratio entails and what is involved in coming up with one. A financial ratio analysis is an important tool for business people be they big business or small ones. It is a ratio that is arrived by after taking two elements of a business financial aspects and comparing them. The ratios are used to establish the businesses’ financial position at a given time. The ratio is similarly used to see what the returns on the capital employed are in order to tell whether a business is making profits or loses.

Telling a businesse’s health

A review of financial ratio analysis will help one tell the financial health of a given business. This is especially important for an investor. Before one invests their money in a given business, they would first want to know how the business is doing. The best way of doing this is by reviewing the financial records of the business. A financial ratio is a much better and simpler way of doing this because one can easily tell from the ratio how the business is doing. The financial ratio may be expressed either in form of a ratio or as a percentage.

When doing a review of financial ratio analysis, one would rely on information derived from balance sheets and income statements. A balance sheet in simple terms refers to a financial statement of the assets, liabilities and the capita (shareholders equity) at a given time. An income statement on the other hand refers to a financial statement that captures a company’s financial record over a given period of time (accounting time). The information that one gets from both the balance sheet as well as the income statement is then used for a financial ratio analysis which is used to simplify the data.

Looking at many ratios

A person who is doing a review of financial ratio analysis will have to look at different ratios before deciding what they see the financial health of a given business to be. A ratio, mathematically, is a comparison between two quantities. A financial ratio can therefore also be said to be a comparison between two financial quantities. In order to be correct, one would need to select the relevant financial quantities and compare them. One cannot just pick on any of the financial quantities to arrive at a correct financial ratio.

Some of the financial ratios include a liquidity ratio which is used to determine the ability of a company to meet its financial obligations. An activity ratio is used to assess the company’s ability to manage its assets. A shareholder ratio is used to tell the profit on each share of stock. There is a return on investment ratio which is used to determine the amount of profit generated by the investment made. In addition, there is the financial leverage ratio which is used to determine the company’s fixed financial obligations. A review of financial ratio analysis should take into consideration all these ratios and many others before one makes a final decision.