In financial field financial ratios are used primarily to evaluate company’s performance and identify its financial situation compared with other firms. Furthermore, financial ratios can be used also to analyze current trends in business or to predict company’s opportunity to go bankrupt. Financial statements are the sources used to calculate financial ratios. Usually, there are several types of financial rations: liquidity ratios, asset turnover ratios, financial leverage ratios, profitability ratios, and dividend policy ratios.
Firstly, liquidity ratios are ratios used for identifying whether the company is able to meet its short-turn obligations (current, quick and cash ratios). Quick ratios, for example, are the measurements of liquidity which doesn’t include current assets. Cash ratios measure whether the company is able to pay off its liabilities and obligations. Secondly, asset turnover ratios are ratios used to identify whether the company effectively utilizes available resources. Turnover ratios are known also as asset management ratios and efficiency ratios.
These ratios are divided into receivables turnover and inventory turnover. Receivable turnover are the primary indicator of how the company is collecting its assets, whereas inventory turnover indicates amounts of goods and services which are sold during the given period. Thirdly, financial leverage ratios are ratios used to identify whether the company is able to meet its long-term liabilities. In other words, in contrast to liquidity ratios these ratios measure how the company utilizes long-turn debts.
Fourthly, profitability ratios are ratios used to identify whether the company successfully generates profits. Profitably ratios measure gross profit from sales, costs of goods, and effective utilizing of available assets. Finally, dividend policy ratios are ratios used to analyze company’s current dividend policy and identify whether the company has chances for future growth and prosperity. References Financial Ratios. (2007). Retrieved October 2, 2007, from http://www. netmba. com/finance/financial/ratios/