Last updated on June 17th, 2022 at 10:38 am
What Are Some Of The Advantages Of Financial Ratio Analysis?
Financial ratios are investigative tools to evaluate the relative health of companies by performing calculations on data items on the income and financial statements, cash flow statements and balance sheets.
Ratios measure the companies' operational liquidity, efficiency, profitability, and stability giving the investors information and results rather than complicated financial data. Both analysts and Investors gain profit-earning advantages in the stock market through the use of the very widely used technique of ratio analysis to give arguably popular and indispensable insider-information on the company’s health.
The advantages of financial analysis:
- Company comparisons: Financial ratios provide a well bench-marked method to compare industries and companies. Using the financial ratios ensures an equal and level playing field of all companies from the point of view of financial analysts. Companies are evaluated based on performance rather than their sales volume, market share or size. The raw financial data comparison of two companies coexisting in the industry can only offer a perspective of limited-insight. Ratios are never mere numbers and are true reflectors of the company’s health and stability. They reflect the profit, growing sales, funding the business, the debt accumulated and many other factors.
Let’s take the example of two companies. The older of the two companies may boast of revenues that are mind-boggling and make it appear stronger than the newer of the two. However, assessing the two companies on the basis of ratios such as ROA-return on assets ROE-return on equity, the profit margins both gross and nett could reveal the smaller company functions more efficiently, while generating more profits and being substantially the healthier of the two in terms of the financial ratios, and assets employed per profit dollar. - Analysis of industry segment: Ratios can forecast trends in particular segments of industries by creating benchmarks against which the industry players can be judged. Small businesses can effectively use industry benchmarks to draw up an effective organizational strategy while measuring their performance as against the industry standards.
- Stock valuation and indices: The understanding of ratios helps investors and analysts to communicate and evaluate the weaknesses and strengths of firms, companies, and industries. Fundamental financial analysis is termed financial ratios and used in determining the relative health of companies as a precursor to investing.
- Performance and planning: Ratios can guide entrepreneurs to better business plans while making presentations, and in guiding investors and lenders. By using the trends for the particular industry owners of small businesses can set realistic time-bound goals for performance in the context of specific ratios giving investors a peek into the true picture of the company. Ratios can also help as a motivator for strategy and change in the organization, providing flags and guidance to the management as constructive feedback reflected as ratios in valuation-shift when the organization changes. Ratios help managers stay alert by reflecting the financial opportunities as well as company weaknesses.
By doing quick financial analysis courses, one can learn the advantages of financial analysis and how to use the tools effectively in becoming a great financial profession. These courses offer a good grasp of basics, concepts, theoretical knowledge, practical skills and certifications that could help enhance your resume and career.
They also offer boot camps, short term workshops, and knowledge valuable to enter the industry. Another advantage in such a course is of mentoring by certified and experienced industry aces that helps garner the latest best practices, techniques, skills, and practice on the latest trending technologies in the financial industry.
Also Read: How Ratio Analysis Helps Modern Age Financial Analyst
