Tuesday, 26 June 2018

Financial Ratio Analysis

Financial Ratio Analysis


Analysis of the assessment of financial performance in the past, present and future. The purpose to find weaknesses in the company's financial performance that may cause future problems and to determine the strength-the strength of a reliable company. For example, an internal analysis conducted by employees of the company with the objective assessment of the liquidity of the company or companies conducting-organizing marker in the past.

Introduction to Financial Ratio Analysis

Financial ratio analysis is also coming from outside the company are partly an effort to determine the reliability of the credibility of the company or the potential of the industry. Any analysis derived from the tool used essentially the same. Financial ratio is the main tool in financial analysis, because it can be used to answer questions about the financial health of the company.

In the implementation of the financial ratio analysis against the financial work is usually there are two way of comparison that will be used the company. About the comparison of both ways, as follows:

Internal Comparisons


Analysis can compare current ratio with ratio of the past and the future in the same company. Current ratio, the ratio of shared assets current liabilities for the current year can compare current ratio in the previous year.

If the ratio of financially sorted in some periods of the year, the analysis can learn composition changes and determine whether there are improvements in the financial condition and performance of the company.

Comparisons to external sources and industry ratios


The second comparison method involves comparison of the ratio of one company with the company with similar companies or the industry average for the same point in time. This comparison provides insights about the financial condition and the relative performance of the company. This ratio also help in identify deviations from the average of the industry standard.

By comparison, the company will be able to find out the trend of changes that occurred during some period of the year that will be analyzed. Whereas through the comparison of external companies can see the power of competition (competition power) in his company, that is, by comparing the ratio of the company's internal financial-ratio with a standard or norm are. But the industry in question is the ratio-financial ratio published by agencies or financial institutions as the standard or the size or sizes that can be compared to a company's financial ratios.

The methods analysis ratio-financial ratio to 2 (two) comparisons, which are:


  1. Compare the ratio now (the present ratio) with ratio-the ratio of us from time to time ago (historical ratio) with ratio-the ratio of predicted to the times that will come from the same company. For example, current ratio, in 2002 as compared to the current ratio from the previous years. By way of comparison will be known alterations of the ratio from year to year. By analyzing a range of ratio just isn't much to say, because it can find out what factors lead to any change.
  2. Compare the ratio-the ratio of a company (corporate/company ratio ratio) with ratio-the ratio of some kind of other similar companies or the industry ratio (ratio of the industry/ratio/average default ratio) for the same time.

By comparing the ratio of the company by the ratio of the industry, it will be known whether the companies concerned that in certain financial aspects are above the industry average (above average), are on the average (average) or under average (below average).

Method of Analysis

So there are 2 (two) comparison of methods used to analyses company financial ratios.its namely internal and external analysis. Internal comparisons, i.e., ratio-the ratio of internal comparison between the ratio-ratio (the ratio of historical) ago with the ratio now (the present ratio). External comparison IE the ratio-a ratio that is accidentally released by institution financial institutions or financial agencies to be used as the standard for companies in analyzing financial ratios-ratio.

Thus, internal and external comparisons is an indicator of the company's financial ratios in drawing up the financial manager can take one of the indicators of the two. These indicators to answer the conditions of the financial performance of the company, so it can take the strategic wisdom of corporate spending in the future. In the United States comparison ratio ratio of firms with industry have been very widespread because of its use in these countries there are some agency or bank who compiled the ratio-the ratio of industry.

In USA if the company wanted to hold the analysis ratio, probably at this time can only hold the internal ratio analysis yet of the existence of institutions or entities that make up the ratio of industry.

Tools & Measurements

Financial ratio analysis is a tool used to measure the weakness and strength faced by companies in the field of finance by comparing the numbers or with more of a financial report, i.e. from the balance sheet and profit loss reports, which will give rise to various ratio that can be used as a measure in analyzing.

The following restriction, the analysis is meant to make it easier for analysts to get an overview of the financial condition of a company spending and wisdom, then the intent to hold the analysis of ratio to hold assessment liquidity, solvency, earning ratios and activity of the company is to be able to give an overview of the use of the financial resources that exist within the company.

The financial ratio is not only needed by the leadership of the company but also by outside parties in this prospective investors or creditors. For the leadership of the company's interest against the financial ratio-ratio to obtain an overview of the weaknesses and strengths facing so that planning and countermeasures thought, while for investors with a ratio can be be used as a handle for whether to buy shares of the company are offered or not.

As such, then it is obvious that hold financial analysis is very important meaning both to the company's own as well as prospective investors or creditors. In an attempt to make it easier to find out whether a firm is working on the sources of their funds efficiently or not then there are some ratio that can be used.

Some opinion as follows:


  1. Liquidity Ratio) is the ratio of the intended measure likwiditas company (Current ratio, acid test ratio)
  2. Ratio of leverage is the ratio that is meant to measure up to how far a company assets financed with debt (the Debt to total Assets ratio, Net worth to debt ratio and others).
  3. A Ratio of activity i.e. ratio is to measure up to the extent of the company's effectiveness in working on the sources of funds (Inventory turnover, Average collection period and others).
  4. The profitability Ratio) shows the end result of a certain amount of discretion and decision (profit margin on sales, Return on total Assets, Return on net worth and others). Ratio one and two are referred to as balance sheet ratio, the third known by the term inter statement ratio while the fourth is known for its income statement ratio.

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