A company prepares its financial statements at the end of the year to study its financial performance. However, interpreting them is not a piece of cake for every stakeholder. It requires complete knowledge of every aspect of accounting and financing. Financial ratio analysis offers a straightforward interpretation of complex numbers. It is a powerful tool that gives insight into the execution of the plans set. It dives deep into the efficiency, profitability, flexibility, and sustainability of the firm.
Financial ratio analysis comprises elements from the balance sheet and income statement. Every ratio gives an idea of whether you lack or excel in that area. There are some standards set for some ratios, while for others, it is context-specific.
There are several ratios available for businesses to analyze. But, they must choose the ratios that align with their goals and objectives. For example- if they want to increase their profitability, they should study the considerable profit margins. The financial ratio analysis falls under the following categories:
Here is a list of some significant ratios and their formulae for businesses to consider for their financial performance: