What is financial analysis and how it is used
Financial analysis can be a very important tool for any small business. First of all, the owner of the business needs to learn how to calculate the ratios and then understand their meaning. The ratios are a comparative tool used for analysis and determining the debt, liquidity, profitability and asset management of a company. These are also the major categories of any financial analysis.
You need to have time series data and industry ratios in order to create a basis for comparison. This information should be taken from your own company’s resources. You can then compare the ratios you have taken from the information about your company to the ratios other similar companies get. You can even compare the ratios of your company for this quarter to the ratios of your company for some of the quarters of the past year.
In case your financial analysis is accurate and you rely only on comparative data you will be able to gain a lot of information related to the financial position of your company. This way you will have the opportunity to make financial adjustments which are needed in order to make the performance of your organization even better.
The five financial ratios categories and what they measure:
The five categories are financial leverage or debt, liquidity, asset efficiency, market value and profitability.
The solvency or liquidity ratio is a measure of the ability of the company to pay its debts that are short-term. This means that this ratio is focused on the current assets of the company that is being examined and examines the current liabilities that can be found on the company’s balance sheets.
The most common ratios when it comes to liquidity are the quick ratio, the current ratio and the interval measure or the burn rate.
The debt or financial leverage ratio is focused on the ability of the company to meet its obligations in the long term. It looks at the long-term liabilities of the company that can be seen on any balance sheet it issues. These can be expressed in the form of bonds in most of the cases.
The total debt ratio, the equity/debt ratio and the ratio of the long-term debt are the most common ratios that can be found in this category.
The turnover or asset efficiency ratio is a measure of the efficiency with which the company uses its available assets for its needs. This means that this ratio is focused on both the balance sheets that express the assets as well as the income statements that represent the sales the company has realized during the last period.
The profitability ratio speaks for itself. It focuses on the ability of the company to generate profit.
The market value ratio is only applicable when it comes to financial analysis of publicly traded companies because they relate to stock price. The price/earnings ratio is a very important part of this category.
When it comes to financial analysis, these are the ratios with which you can compare yourself to other companies.
It doesn’t matter if you are running a large corporation or a small family business-in both cases it is highly likely that you will be exposed to fiscal risk. If you need help managing that risk, please visit this link. Read more about the different card services you can choose from here.
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