RATIO ANALYSIS

Ratio Analysis

Ratio Analysis

Introduction

Financial Ratios are one of the most important and commonly used tool for the financial analysis of a company. It helps analyst to study the performance of the company in comparison with the industry. Sometimes it is difficult to conclude results from just financial statements (Income Statement, Balance Sheet and Cash flow), hence, financial ratios help analyst determine the strength of the company. In attempting to analyze financial statements through the use of financial ratios organizations and investors should have the expertise to interpret them in order to bring about positive changes in the organizational performances. The paragraphs here onwards interpret the ratios to extract meaningful information for decision-making process from the shareholder's or investor's perspective

Financial Ratios

Financial ratio analysis covers the profitability, efficiency, liquidity and the leverage situation of the company. The financial performance that follows is evaluated and analyzed from the perspective of investor or shareholder. However, financial ratios offer assistance to many stakeholders including Banks, Creditors, Government and Investors (Adams, D, 2006).

Profitability Ratios

Profitability ratios explain the performance of an organization in terms of the profit it earns. These ratios show the overall performance of the company. They include return on assets, return on equity, profit margin and gross margin.

Efficiency Ratios

Efficiency ratios or activity ratios, explain the performance of an organization. They include inventory turnover and total asset turnover. It calculates the time in which company receives its recieavable and turns its inventory to sales. These ratios are also very important as it determines the aspects the company needs to work on, it establishes the overall performance of the company. It includes ratios like Inventory Turnover, Account Receivable Turnover and Total Asset Turnover.

Liquidity Ratios

Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements and the ability to pay ...