Monday, 14 July 2014

Financial Ratio

Financial Ratio have 2 functions:

  1) transfer financial data in financial reports into ratio which can provide valuable information to us about the company.
  2) allow financial data of a company becomes comparable with other company.

Financial Ratio basically can be divided into 5 sections based on functions:
  1) ACTIVITY RATIO : To measure efficiency of a company perform its daily main operations.
  2) LIQUIDITY RATIO : To evaluate whether a company will be able to pay its short term debts and interests.
  3) SOLVENCY RATIO : To evaluate whether a company can pay its long term debts.
  4) PROFITABILITY RATIO : To measure how much profit that a company can generate from its resources.
  5) VALUATION RATIO : To measure stock price of a company whether undervalues/overvalues relative to its financial performance.

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