Accounting ratios

Accounting ratios
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Accounting ratios - such ratios, which are created based on market data regarding the company and based on information contained in the company's financial statements, such as balance sheet, profit and loss account, and cash flow statement. They are used to analyze the condition of the company and help in making decisions in the future.

Ratio analysis is an essential element of financial analysis. When conducting index analysis, it should be remembered that it is based on historical data. Ratio analysis also has some advantages over other financial analyzes - it is simply simple. Thanks to the indicators, we can quickly and accurately determine the current trends and changes in financial condition.

Features of financial indicators

Financial indicators must have the following characteristics:

  • Measurability - this feature is ensured by using measurable parameters (derived from the financial statements) for calculations.
  • Comparability - allows comparing the financial indicator to a specific factor in time (changes over the years), planning (plan versus reality), spatial (between companies from the same industry but different economic markets), industry (between companies from the same industry).
  • Interpretability - allows you to read the result and determine the situation, condition of the enterprise.

Basic distribution of financial indicators

The following financial indicators can be distinguished:

  • Liquidity ratio - used to measure and monitor the company's ability to meet short-term liabilities. Maintaining financial liquidity is one of the basic tasks of any business entity that wants to maintain good conditions on the market.
  • Return on investment - is one of the most important indicators and is used to assess the amount of profit achieved. When analyzing profitability, the following are distinguished: sales profitability, economic profitability, financial profitability.
  • The activity indicator - or the efficiency indicator - gives information on how quickly the company has to pay its debts. It is divided into two groups: rotation and cycle indicators.
  • Market value indicator - as the name implies, it is to assess the market value of an enterprise and does so based on the value of its shares on the stock exchange. It should be remembered here that when discussing this indicator, one should take into account the average for a given industry because it does not give an absolute result.
  • Debt ratio - is an extension of the financial liquidity ratio and informs about the company's debt and repayment capacity. This ratio is important for credit institutions because the higher its value, the greater the risk that the borrower will not be able to repay the loans taken out.

References

Author: Julianna Lekarczyk