Financial Ratio Analysis & Interpretation For USA Businesses

What is Ratios?


A ratio is a comparison between two numbers. In finance, Ratio Analysis implies to the examination of various things showing up in the books of accounts or report to provide an exact and yet easy understanding. Every stakeholder, including the company itself, is most interested in the overall health of a company in terms of revenue, liquidity, the efficiency of operations, and profitability.`

Importance of Ratio Analysis for your Organization

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. It assists not only general stakeholder but also assists top management in the major decision as they have to review lesser data as compared to the entire set of books of accounts.

Types of Ratios Analysis:



Profitability ratios:

It compares the companies’ ability to earn generate revenue with its expenses so that it can 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 able to cover short term obligation 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 as well as its investors and creditors for looking at the profitability of the company and to 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 in indicating 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 in identifying and calculating ratios and then providing an in-depth in understanding the business financial performance.

Simplification of Complex Numbers

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

Trends Analysis:

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

Facilitates Industry Comparison

Ratio Analysis is standardized, or we can say similar industry prepare similar ratio making it easier for inter-company comparison, it helps investors and the company to assess and review company’s efficiently.

callbg

Get 30 Mins Free Personalized Consultancy