Financial Ratios and Analysis

To learn about ratios and analytics, we should know the different types or categories of ratios, or we may use ratios to get an answer of some important questions about a firm's operations, such as:

  1. How liquid is the firm? To determine the short-term of a firm or the ability of the firm to meet its short-term (current) financial obligations. And How can company mispresent the liquidity ratios?
  2. Is management generating adequate operating profits on the firm's assets? To determine the performance, profitability or overall earning power of a business. How can company mispresent the profitability ratios?
  3. How effectively a firm is managing its assets? To determine the assets utilization or efficiency in the use of assets of a business to generate sales revenue. How can company mispresent the operating performance measures?
  4. How is the firm financed? To determine he riskiness or long-term solvency of a business.  That is, the level of gearing or leverage or the extent the firm is financed by debt
  5. Are the common stockholders receiving sufficient return on their investment? To determine the potential return and risk associated with owing shares or investing in the stock a company.
Many ratios can be interpreted in different ways, and to know if a particular ratio is good or bad, we should have comprehensive financial analysis and compare them with historical ratios, Industry average ratios, or peer’s ratios rather than the level of a single ratio at a single point in time.