# Financial Ratios – Core factor to Analyse financial statement

Financial Ratios – Core factor to Analyse financial statement, It has been said that not only the finance manager should have the knowledge of reading the balance sheet but should also have the way to know the exact position of the company in terms of figures. The ratios are the one which describes the position of the company in various figures. Through which the person can take many crucial decisions for the better development of the company. There are various ratios which are required to be learnt by every individual which is aiming to take future as finance manager. The whole scenario is elaborated here.

__What is meant by Financial Ratio__?

__What is meant by Financial Ratio__?

Financial Ratio is the ratio which is arrived with the mathematical comparison between the two terms which would indicate the performance of the company. There are many ratios. We would start learning one by one:

__1. Liquidity Ratios__ –

__1. Liquidity Ratios__–

Liquidity ratios indicate that how fast the company can convert its assets into the cash. It is the ability of the company to meet its debt in the short run. The various liquid ratios are as under:

__(a) Current Ratio__:

__(a) Current Ratio__:

This Ratios indicates the companies capability to meet its current/short term liabilities. Higher the ratio indicates the firms have high solvency ratio. The current ratio is expressed as follows – Current ratio – Current Assets/Current Liabilities

__(b) Quick Ratio__:

__(b) Quick Ratio__:

This ratio indicates the further bifurcation of the current ratio, which means the ratio takes into the account the assets which are the most liquid, which would cash the money if they are sold in the market. It is expressed as follows – Quick Assets / Current Liabilities ( Quick Assets means Current Assets excluding Inventories )

__(c) Cash Ratio__:

__(c) Cash Ratio__:

It further bifurcates the quick ratio by taking only the cash or cash equivalents which can render the cash immediately. It is expressed as follows – Cash + Cash equivalents + Current Investments / Current Liabilities

**Must Read –**

**How to Read or Analyse a Balance Sheet****Internal Rate of Return – Intro, Advantages & Disadvantages****Net Present Value (NPV) – Meaning & Calculation**

__2. Leverage Ratios__ –

__2. Leverage Ratios__–

The term Leverage means Risk. This Ratio indicates the Risk arising from the use of the debt in the company. There are many ratios which are included in it. They are:

__(a) Debt-Equity Ratio__:

__(a) Debt-Equity Ratio__:

This ratio indicates the proportion between the debt and the equity from the market which are capable of satisfying the creditors of the company. It is expressed as follows – Debt / Equity. Lower the Ratio, Higher the degree of protection enjoyed by creditors and vice versa.

__(b) Debt-Asset Ratio__:

__(b) Debt-Asset Ratio__:

This ratio shows the company capabilities to which the liabilities support the companies assets. This is expressed as follows – Debt/Assets

__(c) Interest Coverage Ratio__:

__(c) Interest Coverage Ratio__:

This ratios shows the companies capabilities to to pay the interest on the total loan. It is mostly used by the lenders and the credit rating agencies. It is expressed as follows – EBIT/Interest

__3. Turnover Ratios__ –

__3. Turnover Ratios__–

This ratios indicate the companies ability that how efficiently the Assets are employed in the company. There are many turnover ratios, which are explained here.

__(a) Inventory Turnover Ratio__:

__(a) Inventory Turnover Ratio__:

This ratio shows how fast the inventory is moving through and generating the sales. It also shows how efficiently the inventory is managed. Higher the Ratio, more efficient the management is. It is expressed as Inventory/Average Inventory.

__(c) Debtors Turnover Ratio__:

__(c) Debtors Turnover Ratio__:

It shows how efficient is company in extending its credit as well as collecting debts. Higher the ratio, better the credit management. It is expressed as Credit Sales/Average Trade Receivables.

__(b) Fixed Assets Turnover Ratio__:

__(b) Fixed Assets Turnover Ratio__:

How efficiently the fixed assets are employed. It is expressed – Revenue from Operations/Average Net Fixed Assets.

__(d) Total Assets Turnover Ratio__:

__(d) Total Assets Turnover Ratio__:

Shows how efficiently the total assets are employed on overall basis. It is expressed as follows – Total Revenues/Average Total Assets.