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What is Ratio Analysis?

Ratio, as the name suggests, is a comparison between two numbers. In Finance, Ratio Analysis refers to comparing different items appearing in the books of accounts or financial statements to give a precise and understandable interpretation. One common interest of stakeholders, including the company itself, is to assess the health of a company in terms of its revenue, liquidity, the efficiency of operations, and profitability.

We at Whiz Consulting have accounting experts who are specialised in identifying and calculating ratios and giving you an in-depth understanding of your business financial performance. Financial statements are generally insufficient to provide information to the readers or stakeholders at first instance on their own. The numbers shown in those statements required to be put into such a form or format so that stakeholders can better understand different aspects of the company’s operations and its health in the expression given by the company.

While ratio analysis is a part of the financial analysis, you might want financial ratio analysis services for urgent ratio analysis requirements or want specific ratio analysis, which is unique for your business requirement. To cater to this need, Whiz Consulting provides ratio analysis services for Australian businesses. Financial ratio analysis services can help you understand your business shortcomings and strong points to help improve it. Additionally, outsource financial ratios service can help you get a new perspective of your business finance.

Types of Ratios Analysis:

Profitability ratios:

It compares the company’s ability to earn or generate revenue with its expenses to arrive at the desired return rate and recognise any shortfall. It includes ratios like-

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

Liquidity ratios:

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

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

Solvency Ratios & Leverage Ratios:

These ratios measure the company’s ability to make payments and pay off its long-term obligations to creditors. A balanced solvency & leverage ratios 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

Efficiency Ratios or Activity Ratio:

It measures how well a company operate their assets to generate income. It also signifies the time a company takes to collect cash from the customer or the time it takes to convert inventory into cash that is making sales. The management, investors and creditors also use these ratios to assess the profitability of the company’s operation. 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

Return on Investment Ratios:

Return on Investment or Return on Assets measures the 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

Market Ratios:

These ratios help to understand the economic status of the 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 helps indicate 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

The prime benefit of Ratios is - it simplifies complex accounting and Financial data into simple ratios to comprehend what and how the company is performing in terms of its efficiency, solvency, financial efficiency, etc.

Measure Trends

The Ratios calculated over some periods facilitate a trend in the movements of company operations. The ratio analysis report supports the management decision to prepare or approve the budgets for the future based on previous trends.

Facilitates Industry Comparison

The similar Ratios calculated by the companies operating in a similar industry provides a better scope of inter-company comparison. It helps investors and the company assess and review whether they are managing the company efficiently.

Frequently Asked Questions (FAQs)

Ratio analysis is one of the methods a stakeholder can use to understand how a business performs, as a financial statement alone can be challenging to interpret. Further, it assists in effective decision making for the top management to review lesser data compared to the entire set of books of accounts.
Interpreting the ratios accurately is an essential task. It takes skill, financial acumen and foresightedness to be able to interpret ratios. The most straightforward way of doing so is to compare the results with the standard norms and understanding whether it is above or below the norms. Each ratio is to be interpreted differently, so we suggest hiring a professional ratio analysis service provider who can interpret it for you accurately.
One major limitation of ratio analysis is that a single ratio can not help you understand your financial health. So you must calculate multiple ratios to come to some kind of conclusion. Another limitation is that it is based on quantitative aspects of the firm and neglects qualitative aspects of the firm.

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