Ratio Analysis

Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment.

Financial ratios are calculated from one or more pieces of information from a company’s financial statements. For example, the “gross margin” is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is useless piece of information. In context, however a financial ratio can give a financial analyst excellent information of company’s situation and the trends that are developing.

Financial ratio analysis groups the ratio into categories which tell us about different facts of a company’s finances and operations.

·        Liverage Ratios – which show the extent that debt is used in a company’s capital structure.

·        Liquidity Ratios – which give a picture of a company’s short term financial situation or solvency.

·        Operational Ratios – which use turnover measures to show how efficient a company is in its operations and use of assets.

·        Profitability Ratios – which use margin analysis and show the return on sales and capital employed.