Financial Ratio Analysis

Financial ratios are used to measure a company's financial strengths and weaknesses, as well as the profitability of a business. Investors can use financial ratios to evaluate the performance of a company by comparing them to others in the same industry. For instance, the dividend payout ratio can be used to figure out what percentage of the company's earnings are being paid out to shareholders in the form of dividends. Generally, the higher the payout ratio the more attractively are shares of the firm seen by stock traders. This also indicates that the company pays more in dividends and thus less earnings are invested back into the business to create future growth.

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Investment Ratio Analysis & Example
This is used by shareholders or investors to calculate the return on their investments, and to make good decisions about which shares to buy...

Financial Leverage Ratio Analysis
This is used to assess the financial position of a company in terms of its financial stability. It gives an indication of the firm's ability in repaying its long-term debts...

Profitability Ratio Analysis & Example
This is used to assess the profitability of a business in relation to its past performance, or in relation to other companies in the same industry...

Efficiency Ratio Analysis & Example
This is used to analyze how efficiently the firm uses and controls its assets and liabilities internally...

Liquidity Ratio Analysis & Example
This is used to measure the ability of the firm in meeting its short-term liabilities...

Limitations of Financial Ratio Analysis
One of the main limitations is that it may lead to distortion caused by inflation. Price level changes can make the comparison of figures difficult...
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