A Ratio is the comparison between any two magnitudes. Financial Ratio is the comparison between two values from a financial statement. It is also called as accounting ratio. This ratio is being used by all in financial sector to draw a conclusion about the financial status of the sector.
For example debt to equity ratio is a financial ratio of debt by equity which determines the risk of company share. If the company is having low D/E ratio (say 0.6) then the company has more equity to compensate debt. Else if the company has high D/E ratio (say 4) then it means company do not have enough equity to compensate debt.
What is the purpose of financial ratio?
These ratios can be used to compare several factor regarding a company or a sector. Mainly banks use several ratios before providing loans to companies and individuals. In financial analysis the strength and weakness of a company can be found in comparison of these ratios of other company.
Actually a financial ratio can give a brief idea about the whole financial working status of company. Thus investors can check this data before purchasing share, banks before granting loan etc.
Types of Financial ratios.
- Activity ratios- gives an idea how fast a company can convert non cash assets to cash.
- Liquidity ratios- measures ability to compensate cash from assets
- Market ratios- measure the investors stock/share response.
- Debt ratios-measures the ability of company to repay long term debts
- Profitability ratios- measure the ability to generate profit.
- Cash flow ratios-measure the total cash flow from company working.
Recommended Read :
- What are Financial Statements?
- What is a Balance Sheet?
- Financial Statement of a Company 6 Important Points
- What is a Financial Ratio?
- What is Meant By Financial Health of a Company?
- What are Company Earnings?
- What is Working Capital?
- Calculate Working Capital
- What is Earnings Per Share?
- What are Cash Reserves?
- What is Break Even Point of a Company?
- What are Current Liabilities?
- What are Long Term Liabilities?
- What is Debt to Equity Ratio?
- What is Dividend Payout Ratio?
- What is Dividend Yield?
- What is Meant By Liquidity of Funds?
The article gave me a brief knowledge about financial ratio. I searched about this topic in a number of places, but this article is probably the best for explaining it. In a nutshell, yet including all the valid points, the article is written to educate any layman in a perfect manner.
Financial ratio can be used as a benchmark in determining the financial status of the company. Banks check upon it to know the credibility of the company. While the investors check the ratio so as to assure his investment. In totality a good measure to keep a check on the company.
A well-written article by the author which explains lucidly what Financial ratios are all about. I was unaware of this term as I have practically no knowledge of financial terms , but I’m learning day bay day. Articles like these will go a long way in helping me understand the different terminologies associated with the financial sector.
A financial ratio is actually a complicated way of explaining what does company consists of and how it was performing during the business year. An accountant has to make a yearly report of companies business outcome every year.This business reports, include financial ratios, which help owners and potential investors decide whether the company is healthy or not.
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