Financial Statement Ratios indicate the relationship between two or more items of a company which are shown in the financial statement.
The ratio is calculated by comparing the different items contained in the financial report of a company. The ratio is expressed in terms of percentage. It is the most reliable tool applied in the financial analysis. The ratios help to analyze the relationship between the items of the company.
The purpose of ratio calculation is to evaluate the various aspects of a company’s operations. It can be calculated from any couple of numbers. A long list of meaningful ratios can be derived from the prolonged list of numerical featuring in the financial statement. There is no standard ratio for a company each of them is calculated from the the pair of numbers. A number of ratios are available in the list the analysts can select from them the ones they are comfortable with to analyze the financial status of the company. Statement ratios are personal to a company as there is no existence of a standard ratio. Every ratio calculated from the numbers are possessions of a company.
The primary source for calculating the ratio of a company is the financial statement of that company where there are figures depicting the assets, liabilities, gains and losses of the company. The ratio of one company is compared with the ratio of other companies to trace the progress of the company over the years.
Ratios provide a good amount of information about the company. However there are certain limitations pertaining to the informative structure of the ratios. The fact that they are the product of division of numbers limit their usefulness. They can provide a good insight about the strength and weaknesses of a company. But these numbers when used for comparing with other companies can reveal much about the firm. The ratios are immensely important for the analysts and they are the people who ascribe value to the ratios based on their utility.
Types of Ratios:
Ratios are of different types. Various types of ratios are used to analyze companies today. There are several methods available for the analysis of the company.
The most common form of ratio is the Price Ratio (P/E). This ratio reflects the current as well as the highest and lowest prices quoted in the past 52 weeks. It also contains the the annual dividend, the earning ratio, trading volume and the alteration from the previous day. The P/E ratio is calculated by dividing the current market price per share by the current earnings per share. This ratio needs to be compared by the same ratio of the same category belonging to the similar industry. It is influenced by several factors including revenue and growth of sales of a company, the debt-equity structure, the risk involved and the quality of management.
The other forms of ratios are liquid ratios, current ratio, cash ratio, profitability ratio, financial leverage ratio, efficiency ratio, additional ratio, bad-debt to sales ratio and current-liability ratio.
Last Updated on : 26th June 2013