What is Ratio Analysis?

A ratio is a comparison between two numbers. In finance, ratio analysis implies examining various financial statements to provide an accurate and easy to understand interpretation. Every stakeholder is interested in a company's financial health regarding revenue, liquidity, the efficiency of operations, and profitability.

Financial statements are complex and number driven making it difficult for stakeholders to understand. With the help of ratio analysis, these numbers are put in a format easily understandable by stakeholders. However, calculation ratio and interpreting the same is also not something that every individual can do. This gives rise to the need for services like ratio analysis services. An effective ratio analysis service can help you understand different aspects of its operations and financial health.

We at Whiz Consulting provide ratio analysis services for US-based businesses. Our accounting experts specialize in identifying and calculating ratios that help the business get an in-depth understanding of their business financial performance. Apart from general ratio analysis services, we also provide custom ratio analysis as per your business requirement. Our financial ratio analysis service will help you understand your business shortcomings and strong points to help improve it. If you are a business based in Miami, San Francisco, Chicago, New York City, Los Angeles or any other part of the USA and need a ratio analysis services provider, we are your go-to service provider.

Ratio Analysis - Major Types

Profitability ratios:

It compares the companies' ability to generate revenue with its expenses to arrive at a desired rate of return and recognize if there is 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 an important ratio or test to determine the company's ability to cover short-term obligations and cash flow. It includes the ratios like:

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

Return on Investment Ratios:

Return on Investment or Return on assets measures the amount of return on investment, about the investment cost. It is a broad measure of investment profitability. It includes the ratios like:

  • Return on Equity
  • Return on Assets

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 a customer or the time it takes to convert inventory into cash, i.e. making sales. These ratios are also used by the company and its investors and creditors for looking at the company's profitability and comparing them with the competition. 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

Solvency Ratios& Leverage Ratios:

It measures the company's ability to make payments and pay off its long-term obligations to creditors. A balanced solvency & Leverage ratio 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

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:

Our Accounting experts at Whiz Consulting expertise identify and calculate ratios and then provide an in-depth understanding of business financial performance.

Simplification of Complex Numbers

Ratio Analysis simplifies complex accounting and financial data into simple ratios that are easy to comprehend. It shows what and how the companies are performing in terms of efficiency, solvency, financial efficiency, etc.

Trends Analysis:

The Ratios calculated over a period of time provide information on whether there is a positive or negative trend in the movements of Company operations. It supports preparing and approve the budgets for the future based on previous trends.

Facilitates Industry Comparison

Ratio Analysis is standardized. We can say similar industries prepare similar ratios, making it easier for inter-company comparison. It helps the stakeholder assess and review the company's efficiency.

Frequently Asked Questions (FAQs)

The purpose of ratio analysis is to make stakeholders understand the financial health of a business. Financial statements are not sufficient to provide information to their readers or stakeholders. It is incomplete on its own without any interpretation, especially when a reader is not well versed with accounting terms. The figures shown in those statements are required to be put into such a form that stakeholders can have a better understanding of different aspects of the company's operations. Ratio Analysis can be useful for this.
One major drawback of ratio analysis is that you must calculate multiple ratios to understand your financial health. A single ratio can not help you reach any conclusion. Also, ratio analysis is based on quantitative aspects, and it neglects qualitative aspects of a business.
Financial ratio analysis is the practice of comparing two or more items of financial data of a business's financial statements. Financial ratio analysis helps businesses to know their profitability, liquidity state, leveraging control, efficiency, ROI and the economic status of the stock in the case of a public traded company.

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