Financial Ratio Analysis Overview

Financial Ratio Analysis Overview

Financial Ratio Analysis
Financial Ratio Analysis

What is Ratio Analysis? 

Corporate finance ratios are quantitative measures that are used to assess businesses. These ratios are used by financial analysts, equity research analysts, investors, and asset managers to evaluate the overall financial health of businesses, with the end goal of making better investment decisions. Corporate finance ratios are also heavily used by financial managers and C-suite officers to get a better understanding of how their businesses are performing.

Why use Ratio Analysis? 

Ratio analysis is a great way to compare two companies that are different in size operations and management style. It also is a great way to quantify how efficient a company’s operations are and how profitable the business is set up to be. Solvency ratios, for example, can be used to analyze how well a company will be able to meet their financial obligations. 

Types of Ratios? 

Corporate finance ratios can be broken down into four categories that measure different types of financial metrics for a business: 
  1. Profitability Ratio
  2. Leverage Ratios
  3. Efficiency Ratios
  4. Liquidity Ratios
  5. efficiency ratios

1-Profitability Ratio:
Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes its assets to produce profit and value to shareholders.

2-Leverage Ratios:
A leverage ratio is any kind of financial ratio that indicates the level of debt incurred by a business entity against several other accounts in its balance sheet, income statement, or cash flow statement. These ratios provide an indication of how the company’s assets and business operations are financed (using debt or equity).

3-Efficiency Ratios:
Efficiency ratios are used to measure how well a company is utilizing its assets and resources. These ratios generally examine how many times a business can accomplish a metric within a certain period of time, or how long it takes for a business to fulfill segments of its operations.

4-Liquidity Ratios:
Liquidity ratios are used by financial analysts to evaluate the financial soundness of a company. These ratios measure a company’s ability to repay both short-term and long-term debt obligations. Liquidity ratios are often used to determine the riskiness of a firm to decide whether to extend credit to the firm.

5-Multiples Valuation Ratios:
Multiples valuation ratios are used by financial analysts to calculate the value of a company. These ratios can be used to determine the share price of a company going public, a target price for an equity research report, or if a company is under- or over-valued relative to its peers.
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