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A financial ratio is a company’s financial analysis tool to assess the performance of a company based on a comparison of financial data contained in financial statement items such as balance sheets, profit/loss statements, cash flow statements. Financial ratios analyze the financial condition of the company in a certain period to see how the company’s performance. The ratio describes a relationship or balance that occurs between a certain amount with another amount. Aside from that, if you also need to hire a trustworthy bookkeeper for your business, we suggest you go to Richard Darcy Gold Coast Bookkeeper.

Analysis of the company’s financial ratios is conducted at the end of each accounting period. With this analysis, the company will be facilitated to prepare financial reporting for those who need it. For example, investors who will invest funds into the company. With the financial ratio process in the company, the company can present accurate financial statement data for investors. So investors can estimate the valuation invested in the company.

Another example is for creditors. Clear and accurate ratio analysis for company financial statements helps creditors to trust the company. With clear financial data, creditors can assess the company’s financial condition is still healthy or not. So that creditors can entrust a number of loan money to the company to be managed.

There are several financial ratio functions, including these:

Profitability ratio – used to measure a company’s short-term liquidity capability by looking at a company’s current assets against its current debt. These ratios include GPM (Gross Profit Margin), OPM (Operating Profit Margin), NPM (Net Profit Margin), ROA (Return to Total Assets), ROE (Return On Equity).

Liquidity ratio – used to measure a company’s ability to guarantee its current obligations. These ratios include cash ratios, quick ratios, current ratios.

Leverage Ratios – Lever or leverage ratios are used to measure the level of management of a company’s funding sources. Some of these ratios include the ratio of Total Debt to Own Capital, Total Debt to Total Assets, TIE Time Interest Earned.

The activity ratio describes the activities carried out by the company in carrying out its operations both in sales, purchasing, and other activities.

Investment ratio – used to measure a company’s ability to provide returns or rewards to funders, especially investors who are in the capital market for a certain period of time.