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What Are Financial Ratios?
Finance is a vast field of business management which is a necessity for all kinds of business activities regardless of any nature. It plays a vital role in the progression of businesses to stable and to enhance their capabilities to meet the competitive market in the best possible way. It is essential to know for the stakeholders whether the business is performing well or not and the financial ratios help out to check out the financial performance of an organisation or a business. Financial ratios are one of the parameters that evaluate the performance of the business or an organisation. Ratio analysis involves the procedure of comparison of the provided items in the financial statements of the selected organisation. Financial ratios hare required for the businesses at the time of solvency, efficiency, or profitability. The computation of various ratios is what actually matters.
Group of Ratios
There are many types of ratio analysis and detailed computation of these ratios is what exactly confuse students to complete the ratio analysis assignment What I have observed among students is that they tried to memorize the formulas and calculations instead of getting the right understanding of the procedures. It is highly recommended for the students to understand this topic instead of memorizing it. The Best assignment help can assist you in completing your ratio analysis assignment effectively and efficiently. Let us see some of the most important and basic ratio analysis.
Liquidity ratios are one of the types of financial ratios that help the organisation to pay back the short term and long-term loans. It actually shows the ability of the debtor to pay out its debts from its current assets without raising any extra capital externally. The liquidity ratios are further divided into three subcategories, which include the following;
- Current Ratio
Current ratio = Current assets / Current liabilities
- Acid-Test Ratio
Acid-test ratio = Current assets – Inventories / Current liabilities
- Cash Ratio
Cash ratio = Cash and Cash equivalents / Current Liabilities
Leverage Financial Ratios
Leverage financial ratios are one of the types of financial resources that helps to check the amount of capital that is raised through debts. It actually evaluates the debt level of an organisation or the business. The leverage financial ratios include the following;
- Debt Ratio
Debt ratio = Total liabilities / Total assets
- Debt To Equity Ratio
Debt to equity ratio = Total liabilities / Shareholder’s equity
- Interest Coverage Ratio
Interest coverage ratio = Operating income / Interest expenses
- Debt Service Coverage Ratio
Debt service coverage ratio = Operating income / Total debt service
It is one of the most required types of financial ratios that help to calculate and to determine how good a company is managing its available resources and the provided assets. It actually tells if the organisation is efficient to provide the best possible results using the limited resources. Let us see some of the types of efficiency ratios.
- Asset Turnover Ratio
Asset Turnover Ratio = Net Sales / Total Sales
- Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of goods sold / Average Inventory
- Receivable Turnover Ratio
Receivable Turnover Ratio = Net credit sales / Average account receivable
- Days Sales In Inventory Ratio
Days Sales in Inventory Ratio = 365 days / Inventory turnover ratio
Profitability ratios help the organisation to check the performance. The performance of the organisation includes return on investment, return on sales, operating margin, and return on asset, gross profit margin, and many more. Let’s see some of the types of profitability ratio that helps the business to acknowledge its profits.
- Gross Margin Ratio
Gross Margin Ratio = Gross Profit / Net Sales
- Operating Margin Ratio
Operating Margin Ratio = Operating Income / Net Sales
- Return On Assets Ratio
Return On Assets Ratio = Net Income / Total Assets
- Return On Equity Ratio
Return On Equity Ratio = Net Income / Shareholders’ Equity
Market Value Ratios
Market value ratio shares are one of the most important types of financial ratios that help to determine the current share price of a public held Company stocks and further assist to determine whether the company’s share is overpriced or under priced. Let’s see the types of market value ratios.
- Book Value Per Share Ratio
Book Value Per Share Ratio = Total Shares Outstanding
- Dividend Yield Ratio
Dividend Yield Ratio = Dividend Per Share / Share Price
- Earnings Per Share Ration
Net Earnings / Total Shares Outstanding
- Price-Earnings Ratio
Price-earnings Ratio = Share Price / Earnings per Share