Understanding The Financial Ratios

 Understanding The Financial Ratios

There are various ways one can monitor the business’s financial performance using the data available. By making use of the financial ratios, one can easily assess where the business is underperforming. Also, it helps in judging the effect of changes one part will have on another area.

By closely monitoring the figures you could minimize the waste and maximize the efficiency which would help the business to run smoothly in long run.  Business usually resorts to various financial ratios which will help them in monitoring the cash flow, non- financial factors like customer satisfaction, staff turnover, etc and profitability. The same applies to trade; you need to closely monitor all the activities so that you can take decisions which will increase the profit of your investments. If you don’t have much time in your hand to monitor continuously, you can opt to trade through the trading robots. Read through this review to learn about the process of trading using the robots.

Using ratios in business for monitoring

Ratios show how one number is related to another. When you conduct financial analysis, the ratios would be expressed as percentage or rate, depending on your preference. Financial ratios have to be compared with the following things for better monitoring purpose:

  • General business standards or industry benchmarks
  • The trend of the past year result (trend analysis)
  • Budgeted results
  • Results of the competitors
  • Effect of various economic conditions

 Financial ratios used commonly

You need to have a clear understanding of the financial ratios to be used. Most common categories of the ratios used are:

Liquidity and cash flow- These ratios to are used to assess the working capital amount of the business and to work out the solvency of the business in the medium or short term.

Return and risk- These ratios are used to judge the success rate of the investment made into your business and to find what effect any further investment will have on specific parts of the business.

Profitability- This uses the net profit margin and gross profit margin as two key indicators to measure the performance of the business and the likelihood of its success.

Sales and stock turnover- It uses this ratio to identify the deficiencies or overstocking in marketing or production strategies.

There are even non-financial ratios which are very much important for the business as it helps in highlighting those issues which will not show in the balance sheet.