Financial Ratio Analysis & Interpretation For Small Business

What are Ratios

Ratios are a comparison of two numbers with respect to each other. Similarly, in finance, ratios are a correlation between two value, or rather two accounts. So, two numbers derived from the financial statement are compared to give us a better understanding by breaking down complex element to more easily interpretable format. The most common interest of most of the stakeholder including the company itself is to assess the health of a company in terms of its Revenue, its liquidity, the efficiency of operations, and profitability. Ratio Analysis hence becomes a vital tool for financial analysis and financial management.

How Ratio Analysis Helps Getting Right Information about Company’s Financial Insights in India?

Looking at a profit and loss account and a balance sheet can give you a clear idea of the health of your business. However, for many people, these statements are somewhat daunting. However, calculating a few financial ratios can help you to assess quickly how well you are doing and give you early warning of financial problems. Ratio Analysis is a good way to evaluate the financial results of your business in order to gauge its performance.

Types of Ratios:

Profitability ratios:

It compares the company’s ability to earn or generaterevenue with its expenses so that it can arrive at a desired rate of return and recognise if there is any shortfall. It includes ratios like-

  • Gross Profit Ratio
  • Operating Profit Ratio
  • Net Profit Ratios
  • Interest Coverage Ratio

Liquidity ratios:

This ratio measures the ability of a company to pay its debt on time. It is an important ratio or test to determine company ability to cover short term obligation and cash flow. It includes the ratios like-

  • Current Ratio
  • Working Capital Ratio
  • Quick Ratios etc.

Return on Investment Ratios:

Return on Investment orReturn on Assets measuresthe amount of return on investment concerning the investment cost. It is a broad measure of investment profitability. It includes the ratios like-

  • Return on Equity
  • Return on Assets

Efficiency Ratios or Activity Ratio:

It measures how well a company operate their assets to generate income. It also signifies the time acompany takes to collect cash from the customer or the time it takesto convert inventory into cash that is making sales. It includes the ratios like-

  • Inventory Turnover Ratio
  • Inventory Days
  • Accounts Receivable Ratio
  • Accounts Receivable Days
  • Accounts Payable Ratio
  • Accounts Payable Days
  • Working Capital Turnover
  • Cash Turnover

Solvency Ratios& Leverage Ratios:

It measures your business’s ability to make payments and pay off its long-term obligations to creditors. A balanced ratio indicate a more creditworthy and financially sound company in the long-term. It includes the ratios like-

  • Debt to Equity
  • Debt to Capital
  • Debt to Tangible Net Worth
  • Total Liabilities to Equity
  • Total Assets to Equity
  • Debt to EBITDA

Market Ratios:

These ratios help to understand the economic status ofthe stock of a particular public traded company. They determine the connection between the price per share of a company and its earnings, growth and assets, or we can say it helpsin indicating the value of a company. It includes the Ratios like-

  • Dividend Yield
  • Earnings Per Share
  • Price Earnings Ratio

Benefits of Accounting Ratios:

We at Whiz Consulting have accounting experts who are specialised in identifying and calculating ratios and giving you in-depth in understanding your business financial performance.

Simplification of Complex Numbers

Ratio analysis simplifies complex accounting and financial data into simple ratios which can be to comprehended by stakeholders making it easier to take future decision.

Measure Trends

Ratios help compare current performance with previous records and facilitates trend in the movements of company operations. It also helps monitor and identify issues that can be highlighted and resolved.  

Facilitates Industry Comparison

Ratios help compare a firm’s performance with similar competitors operating in a similar industry provides a better scope of inter-company comparison. It helps investors as well as the company to assess and review whether they are managing the company efficiently.

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