Financial Performance of a Business
The financial structure and the relative financial strength of the companies is sometimes required to be looked into internally to decide on any expansion projects or to assess the need for additional financing. From an external angle, the investors to make their decisions to invest on the securities of any particular company will look into the financial ratios of the company. Similarly the lenders also determine the financial stability and strength of the company by looking in to various financial ratios calculated on the basis of the balance sheet of the company.
For an internal financial analysis the key financial ratios are of crucial importance to judge the financial health and identify the areas where improvement is required. The functions of the financial ratios are multifold and quite often they serve as the indicators of the direction of the company’s growth and profitability. There are a wide range of financial ratios that are available which generally are considered while judging the financial performance of a company for a given period.
In this context this paper discusses the capabilities of the financial ratios as a simple and effective means of examining the financial performance of a business. To illustrate the point the paper
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The level of the ratios and the historical trends of these ratios can be analysed to draw inferences about the present and past financial stability and the effectiveness of the operations of the company apart from its profitability and growth prospects. “Ratios are used to make comparisons between different aspects of a company’s performance or within a particular industry or region. They reveal very basic information such as whether you’ve accumulated too much debt, are stockpiling too much inventory or not collecting receivables fast enough.
” (BDC) Financial ratios are basically calculated on the basis of information being provided by a company’s financial statements. The financial ratios if considered in isolation are of no use to the reader. However when the ratios are studied in the context of other companies or industry the ratios are of immense use to the analysts as well as other readers of the ratios, 3. 0 Classification of Financial Ratios
The financial ratios can be classified in to different groups on the basis of the information they use for calculation and also the information they reveal to the readers. The following are some of the types of ratios that are normally being used for analysis: • Liquidity ratios • Asset turnover ratios • Financial leverage ratios • Profitability ratios • Dividend policy ratios Each of the above ratios provides different kinds of information to the analysts and others which are useful in examining the financial performance of any business.