What is Financial Ratio Analysis, and How to use it?
No wonder finance and hardcore mathematical calculations can make you sweat. But the good news is there are short-cut formulas that can surely help you to relieve some of this stress. But what if you don’t know the basics of financial ratios and their application? Don’t worry. Here, I have shared the ABC of ratio analysis that a finance student must know.
So, if you also struggle with memorizing formulas and seeking finance assignment help, you are in the right place.
Sit back and keep reading to unveil the fundamentals of ratio analysis:
What is Ratio Analysis?
Ratio analysis is all about examining a company’s financial performance through income statements and balance sheets. Accountants analyze business progress by calculating liquidity ratios, profitability ratios, and operational efficiency.
What is the use of ratio analysis?
There are three ways how you can utilize ratio analysis techniques:
- You can determine business trends by calculating ratios.
- Investors use this to understand whether the profit is going up or down.
- You can compare your business performance with the competitors.
What are the categories of ratio analysis?
| CATEGORIES | SUB-CATEGORIES |
| Profitability Ratio |
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| Liquidity Ratio |
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| Leverage Ratio |
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| Market Value Ratio |
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| Efficiency Ratio |
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If you search https://myassignment.live/assessment-help.html, you will find experts who offer assessment help for students, stating, “There are generally five kinds of financial ratios, and each ratio has different subcategories. To understand them, students must be aware of their definitions and functions.” Considering experts’ suggestions in the next section, the meanings and functions of different ratios are discussed briefly.
Definition of Different Ratios
Liquidity ratio: Liquidity ratios help to measure the short-term and long-term financial obligations that a company needs to pay within a year or more.
| EXAMPLE
Suppose a company has current assets amounting to $120 and liabilities of $40. You can use the current ratio formula. current ratio = Current assets/ Current liabilities = $120/$40 =$ 3 That means the company has $3 of current assets for every dollar of current liabilities. |
rofitability ratio: It helps to analyze companies’ ability to generate revenue relative to assets, balance sheet, operating costs, and equity.
| EXAMPLE
Suppose a company has a revenue of $20000 and made a net profit of $5000; you can calculate its profitability by applying the net profit margin formula. Net profit margin= Net profits/ net sales *100 = $5000/$20000*100 =40% |
Leverage Ratio: Leverage ratios are used to measure abilities to repay debts or financial obligations.
| EXAMPLE
If the total assets of a company are $20000 and the total liabilities are $5000. You can find how much a comany’s assets are funded through debts through debt to assets ratio. (Short-Term Debt+Long-Term Debt)/Total assets=$5000/$20000 =40% |
Market Value Ratio: It is one of the key financial metrics that helps companies analyze their current market price by comparing the P/E of their closest competitors.
| EXAMPLE
Imagine the company’s stock price closed at $60 in 2024. Its profit for the same financial year was $10, and outstanding shares were $5. Then its earning per share would be ($10/$5)=$2. And the price-earnings ratio will be: Market value per share / Earnings per share=$60/$2 =$30 |
Efficiency Ratio: Efficiency ratios are also known as inventory turnover and are helpful in terms of investigating the current performance of a business.
| EXAMPLE
If a company sells cost of goods amounting to $100,000 and its year end inventory $10,000. Then, the inventory turnover will be: Inventory Turnover = Cost of goods Sold / Average Inventory =$100,o00/$10,000 =$10 With this information, you can determine the company’s inventory control and management. |
How to Calculate Other Financial Ratios?
Here are a few examples of ratio calculations. Let’s Check it out and save it for future reference:
| RATIOS | FORMULAS |
| Operating Profit Margin | Operating Profit Margin= Operating Profit/Total Revenue |
| Gross profit margin | Gross Profit Margin=(Revenue-Cost of goods sold)/Revenue*100 |
| EBITDA margin | EBITDA/total revenue*100 |
| Cash flow margin ratio | Cash flow from operating activities/ Revenue |
| Return on equity | ROE= Net income/Shareholders’ equity |
| Return on assets | ROA= Net income/Total Assets |
| Return on invested capital | ROIC= (Net income-Dividends)/ (Debt+Equity) |
| Quick ratio | Current assets-Inventory/current liabilities |
| Operating cash flow ratio | Cash flow from operations/Current liabilities |
| Debt to equity ratio | (Short-term debt+Long-term debt+Other fixed
payments)/Shareholders’ equity |
| Accounts payable turnover ratio | Net credit purchases/Average accounts payable |
| Asset turnover ratio | Net Sales/Average Total assets |
| Days sales in inventory | (Average inventory/cost of goods sold)*365 |
As you can see, there are different formulas for calculating financial ratios. But the problem is many students fail to memorize them. Moreover, limited time often creates challenges to conduct extensive research. As a result, students seek external support for assessment help.
According to them, it’s better to seek professional assistance to understand ratio calculations, as one mistake can ruin their entire semester.
Final Thought
It is really overwhelming to understand each concept behind financial ratios and utilize them properly. The vast data set makes it even more challenging for students especially for beginners. But, instead of struggling alone, if you get help from superiors or specialists who have hands-on experience in finance or economics, you may surely identify your weaknesses. This process will not only help you to improve your subject-specific knowledge but also prepare you for your upcoming projects.
