Financial ratios

Financial ratios

The study for economics is essential and has provided learners and the general public with the relevant information required for researching, analyzing, teaching, and writing about extensive regional and financial issues. An economist is always there to provide us with the most critical information that is needed for making and understanding the senses of our convoluted business environment. As a centralized reserve economist, one of the primary responsibilities should be to share this kind of knowledge through such ways as presentations, publications, and web-based products. This will ensure that the information is always beneficial to others, especially to those who are in the financial sector. Economics is defined as a study of how people use the scarce and rare resources to produce goods and services that are later distributed to different people. Such goods and services are always insatiable, and it is hard to meet their demands. From this definition of economics, we can derive two specific ideas that goods are still scarce, and as a result, society should always use its resources well and efficiently. Indeed, economics is an essential subject. Let’s consider financial ratios for the business using this subject.

Financial ratios are a relationship that depends wholly on the company’s financial information, and their primary purpose in business is to make the comparison. Examples of the common financial ratios may include the return on assets (RAO), debt-to-equity, and return on investment (RAO), to name a few. Such ratio comes as a result of a financial measurement with the other or as a result of dividing one account with the other. Generally, these accounts or measures are usually found on the financial statements of the company, such as the income statement, balance sheet, statements of the changes in owners’ equity, or the cash flow statements. In most cases, the financial ratios are used mostly by the managers or the business owners to evaluate the progress of their business against their competitors, predetermined internal goal, or the overall performance in the entire industry. At sometimes, it becomes necessary to use the financial ratios in business as a way of identifying different trends in a business in its early stages. Besides, ratios are also used by investors, business analysts, and bankers to assess the company’s financial status.

There are different ways that we calculate the financial ratios. One of the most common ways is by dividing one number by the other number. For example, we find the financial ratio by dividing the total sales with a specific number of employees in a company. Through this, the owners of the business can examine the relationship that exists between items and assess that relationship. One of the advantages of the financial ratios is that they are straightforward to use, simple to calculate, and they provide to the business owners and managers with insight into how the business is operating. Such ideas are not always brought clear upon the review of the relevant financial statements alone. It will not wrong if at all, we described the financial ratios as the aid to judgment. The reason for saying is the fact they cannot take the position of experience with all means. A good manager can only become a better manger through a continuous experience of reading and tracking the ratios over a long period. Ratios can assist in pointing out the areas that require attention before the threatening problem within the business is quickly notable.

Almost every financial statistic can be compared with the use of financial ratios. However, in a real situation, the managers and small business owner’s needs to be interested with the small set of ratios since these are the one they can use to identify where the mistake is and eventually make an improvement that is required. It is imperative to note that the financial ratios are, at times, very sensitive. The reason for saying this is because mostly they only represent the real picture of the company or a business at that particular time the figures were taken. An excellent example to illustrate is a case of a business owner who intends to calculate his or her ratio before and after the festive season. Such a business owner is automatic that he or she will get a different result in comparison with before the festive season and after the festive season. Considering such a case, we can, therefore, conclude that the financial ratio sometimes might be misleading while they are taken singly. But this not the case always, sometimes it is beneficial primarily when the small business uses them as the basis for comparison or track them over time for comparison against industry standards or company goals.

Perhaps the perfect ways both the small business and the prominent business owner to use financial ratios can be carried out a formal ratio examination regularly. Such raw data that is used to calculate the ratios should be recorded and used every month. When this is done, the significant ratios should be recorded, computed, reviewed, and finally saved for future use to make the comparisons. Certain things are looked into before determining which ratio to calculate. One must always look at the age of the business, the type of business, and the point the business cycle is, among other relevant information. For example, a business that depends on its large number of fixed assets to calculate the financial ratios may be the most considerable. To conclude, the financial ratio can be broken down into four main categories, which include liquidity, profitability, operating, and leverage.