Financial ratios are mathematical ratios of the information derived from balance sheet and income statement which give the relationship between different financial data.
Ratio analysis is the analysis of the financial ratios. It’s useful in comparing a firm’s healthiness and profitability with other firms and also to compare the same company’s figures with its historical data. It helps in identifying current trends of the company so that future can be planned. It helps in identifying gaps between the business expectations and actual performance.
Financial ratios can be divided into the following categories depending on the type of information they provide.
Liquidity ratios
Leverage ratios
Asset Turnover ratios
Profitability ratios
Dividend Policy Ratios
We had already discussed liquidity ratios (current ratio and quick ratio) and I will cover the other ratios in the next posts.
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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It’s so important that business owners understand their numbers and I’ve noticed that people particularly have a rough time with ratios. Finding a resource that helps explain them and why the matter is a good find. Thanks for sharing.