Conducting financial ratio analysis is important in running a business. You must understand about financial ratios, because many benefits can be obtained if you can analyze the company’s financial ratios. These financial ratios will help you measure the success of the company.
It also can assess the merits of financial decisions taken. The prosperity of shareholders (as indicated by the share price) depends on good financial decisions. Financial decisions in question such as investment, funding, and dividend policy.
Financial ratios are a tool to analyze and measure company performance using the company’s financial data. Financial data can be taken from financial statements such as income statements, balance sheets, cash flow statements, and other reports. Based on its purpose, the financial ratio is divided into four. The following explains the financial ratios and their objectives.
Profitability ratios indicate a company’s ability to generate profits (profits). By using this ratio you can find out the survival of the company (going concern). There are five measurements that can be used to measure profitability ratios.
Gross Profit Margin
Demonstrate the company’s ability to generate gross profit that can be achieved from each sale.The greater the calculation results indicate the better financial condition of the company. Here’s how to calculate it:
(Gross profit of the company / Corporate income) x 100%
Operating Profit Margin
Profit margins describe the net profit before interest and taxes obtained from the sale of the company. This ratio can be seen in the income statement in the common size analysis section. This ratio is also interpreted as a measure of the efficiency of how companies reduce costs in a period. How to calculate it is with the following formula:
(Operating profit / Net sales)
Net Profit Margin
This ratio measures the amount of rupiah net profit generated by each one selling rupiah. The higher the ratio means the better, because it shows the company’s ability to generate profits.
Return On Assets (ROA)
ROA shows the company’s ability to generate after tax operating profit from total assets owned by the company. The calculated profit is profit before interest and tax or EBIT (Earning Before Interest and Tax).
Return On Investment (ROI)
ROI shows the company’s ability to generate profits that will be used to cover the investment incurred. Profit used to calculate this ratio is earnings after tax / Earning After tax (EAT). The bigger the result, the better.
The liquidity ratio shows the company’s ability to meet its short-term financial obligations, such as paying salaries, due debts, operational costs, and others. The ratios that are often used to calculate this are:
This ratio shows the ratio of current assets to current liabilities. The higher the meaning, the better the liquidity. The current ratio formula is
Current ratio = Current assets / Current liabilities
Quick ratio shows the ratio between (cash + short-term securities + accounts receivable) with current liabilities. In other words, the balance between current assets less inventory and current debt. Quick ratio is also commonly called the acid test ratio. Inventories are not included in the calculation of this ratio because inventory is a current asset that has a low level of liquidity. The higher the result, the better the liquidity.
The solvency ratio shows the company’s ability to fulfill all of its obligations both long term and short term if the company is liquidated. So a solvable company is not necessarily illiquid, and a non-solvable company is not necessarily liquid. Companies that do not have sufficient assets to pay debts are usually referred to as unsolvable companies. There are 2 ratios used to calculate it.
Total Debt to Total Assets Ratio
This ratio is known as the debt ratio, which measures the amount of funds that come from debt. This ratio shows the extent to which debt can be covered by company assets. The smaller the ratio the more safe to eat (solvable). Creditors will prefer a low debt ratio.
Debt to Equity Ratio
This ratio is used to measure debt held with own capital. The company’s debt should not exceed the company’s own capital. This is so that the fixed burden incurred by the company is not high.