Ratios for Financial Statement Analysis
Financial ratio analysis is the process of calculating financial ratios, which are mathematical indicators calculated by comparing key financial information appearing in financial statements of a business, and analyzing those to find out reasons behind the business’s current financial position and its recent financial performance, and develop expectation about its future outlook.
Financial Ratios for Financial Statement Analysis
When a banker, credit manager or investor receives
the financial information desired, an analysis is started
and the leading tool most analysts use is ratio analysis.
Ratios are a means of highlighting relationships
between financial statement items.
For example, net profit margin is a financial ratio which compares a business’s net income with its net revenue to find out the dollars of profit the business earned per $100 of sales. Net profit margin ratio helps find out if a business is more profitable than its peers or for example if its profitability has increased over different periods.
Financial Ratios and Analysis | Explanation | AccountingCoach
Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy.
Business Financial Analysis Using Ratios
The Quarterly Financial Survey (QFS) conducted by Stats SA reports, amongst other financial variables of income and expenditure, capital expendture and inventories, selected operating financial ratios for each industry covered by the survey. These ratios include:
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To illustrate the significance of ratio analysis, this article will examine the profit margin ratio (which expresses the profit or loss before tax as a percentage of sales). The profit margin ratio is calculated by dividing the profit or loss before tax by sales or by turnover as presented in the survey. The profit margin ratio measures how much of each rand earned by the industry is translated into profits and provides insight into the industry’s pricing policies, cost structure and production efficiency.
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Financial ratios for small, medium and large size groups can be calculated using the above information as well as the formula for each specific ratio as presented in the QFS publication. For example,the following formula is applied to the small, medium and large estimates to calculate the profit margin ratio:
Financial Ratios For Ratio Analysis | Examples | Formulas
The results of the QFS survey (which covers a sample of 5000 private and selected public enterprises operating in the formal business sector of the South African economy, excluding agriculture, financial intermediation, insurance and government institutions) are published three months after the reference quarter. The QFS publication also allows for various other types of analysis, using the different variables contained therein. Readers are encouraged to delve into the various relationships using the QFS data, either at the aggregated or small, medium and large diasggregated level (the data being accessible from the Stats SA website). Estimates for small, medium and large categories for each industry are available in Excel and are published at the same time as the QFS statistical release.