Financial ratios: Meaning, calculation and application

Sanjay K.

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Financial ratios: Meaning, calculation and application

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Abstract

A financial statement generally refers to the basis statements, which are as follows
i) The income statement
ii) The balance sheet
iii) Statement of retained earnings
iv) Statement of charge in financial position in addition to the above two statements.

Financial statement analysis is the process of identifying the financial strengths and weaknesses of an organization as per the accounting reports and financial statements. The analysis is done by establishing a relationship between the items of the balance sheet and profit and loss account and the first task of a financial analyst is to determine the information that is relevant to the decisions under consideration from the available information in the financial statement. The second step is to arrange information to highlight a significant relationship. The third and the final procedure is interpretation and drawing of results and conclusions. Therefore financial analysis is the process of selection and understanding/evaluation of the accounting data/information.

Introduction
Financial statement analysis
Comparative financial statement
1. Comparative income statement
2. Comparative balance sheet
Common-size financial statement
Ratio analysis
Classification of ratios
1. Liquidity ratios
2. Leverage ratios
3. Activity ratios
4. Profitability ratios
Bibliography

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[...] The term ratio in it refers to the relationship expressed in mathematical terms between two individual figures or group of figures connected with each other in some logical manner and are selected from financial statements of the concern. The ratio analysis is based on the fact that a single accounting figure by it self may not communicate any meaningful information but when expressed as a relative to some other figure, it may definitely provide some significant information the relationship between two or more accounting figure/groups is called a financial ratio helps to express the relationship between two accounting figures in such a way that users can draw conclusions about the performance, strengths and weakness of a firm. [...]

[...] common-size financial statement: Common-size financial statements are those in which figures reported are converted into percentages to some common base in the income statement the sales figure is assumed to be 100 and all figures are expressed as a percentage of sales. Similarly, in the balance sheet, the total of assets or liabilities is taken as 100 and all the figures are expressed as a percentage of this total. Ratio analysis: Ratio analysis is a widely used tool of financial analysis. [...]

[...] Proprietor's funds Proprietary ratio = Total tangible assets Activity ratios: These ratios evaluate the use of the total resources of the business concern along with the use of the components of total assets. They are intended to measure the effectiveness of the assets management the efficiency with which the assts are used would be reflected in the speed and rapidity with which the assets are converted into sales. The greater the rate of turnover, the more efficient the management would be (E.g.) stock turnover ratio, fixed assets turnover ratios etc . [...]

[...] Cash + bank +marketable securities Absolute liquidity ratio = Current liabilities Leverage ratios: Many financial analyses are interested in the relative use of debt and equity in the firm. The term ‘solvency' refers to the ability of a concern to meet its long-term obligation. Accordingly, long-term solvency ratios indicate a firm's ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowings. (E.g.) debt equity ratio, proprietary ratio, etc . DEBT EQUITY ratio: It expresses the relationship between the external equities and internal equities or the relationship between borrowed funds and ‘owners' capital. [...]

[...] Cash + bank +marketable securities Absolute liquidity ratio = Current liabilities LEVERAGE RATIOS: Many financial analyses are interested in the relative use of debt and equity in the firm. The term ‘solvency' refers to the ability of a concern to meet its long-term obligation. Accordingly, long-term solvency ratios indicate a firm's ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowings. (E.g.) debt equity ratio, proprietary ratio, etc . Debt equity ratio: It expresses the relationship between the external equities and internal equities or the relationship between borrowed funds and ‘owners' capital. [...]

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