4 Ways to Assess Company Performance with Financial Ratios
Performing finances is important for many businesses in the world. You must understand ratios because there are many benefits that you can obtain if you can analyze ratios. These financial ratios will help you measure the success of the company.
It can also assess the pros and cons of financial decisions taken. Shareholders’ prosperity (as indicated by the share price) depends on good financial decisions. These financial decisions include investment, and etc.
Financial ratios is a tool for analyzing and measuring company performance using the company’s financial data. Financial data can be taken from financial reports such as income statements, balance sheets, cash flow reports, and other reports. Based on the objective, the financial ratios are divided into four. The following is an explanation of financial ratios and their objectives.
1. Financial Profitability Ratios
Rasio profitabilitas menunjukan kemampuan perusahaan menghasilkan keuntungan (laba).
By using this ratio you can find out the company’s survival (going concern). Five measures can be used to measure the profitability ratio.
- Gross Profit Margin
Shows the company’s ability to generate the gross profit that can be achieved from each sale. Gross profit margin is a comparison of gross profit and sales in the same period. The bigger the calculation result, the better the company’s financial condition. Here’s how to calculate it:
(Company gross profit/company revenue) x 100%
- Operating Profit Margin
Profit margin describes the net profit before interest and taxes earned from company sales. 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 the company reduces 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 every one rupiah sale. The higher the ratio, the better, because it shows the company’s ability to generate profits.
2. Liquidity Financial Ratios
The liquidity ratio shows the company’s ability to meet short-term financial obligations.
Such as paying salaries, overdue debts, operating costs, and others. The ratios that are often used to calculate this are:
- Quick Ratio
The quick ratio can compare between (cash + short-term securities + receivables) and current liabilities. In other words, it is the total balance between current assets fewer inventories, and current debt. The quick ratio is also known as the acid test ratio. Inventory is not included in the calculation of this ratio because inventory is a current asset that has a small level of liquidity. The higher the yield, the better the liquidity.
3. Financial Solvency Ratios
The solvency ratio shows the company’s ability to fulfill all of its obligations both in the long and short term if the company is liquidated.
So companies that are solvable are not necessarily illiquid, and companies that are not solvable are not necessarily liquid. Companies that do not have sufficient assets to pay debts are usually called 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 number 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 safer (solvable). Creditors will prefer a low debt ratio.
- Debt to Equity Ratio
The company’s debt should not exceed the company’s capital. This is so that the fixed expenses incurred by the company are not high. The smaller the debt to capital, the better and safer.
4. Financial Activity Ratios
Measure the level of use of the company’s assets or assets to you.
The trick is to look at several assets, then you determine what the level of activity on the assets is in a particular activity. After that, you will know which assets are productive and which assets are less productive. So that then you can decide on a larger allocation of funds for productive assets. Here’s an example of an activity ratio:
- Accounts Receivable Turnover Ratio
This ratio measures the effectiveness of accounts receivable management. The higher the turnover, the more effective the management. With this ratio, you can see the management of accounts receivable and credit policies. The formula is:
Accounts receivable turnover = Net sales / Average trade receivables
- Inventory Turnover Ratio
This ratio shows the company’s liquidity in managing its supplies. The higher the rotation, the better. This means that the company sells and manages inventory quickly and well. If it is low it means that the effectiveness of inventory control is not good. How to calculate it is:
Inventory Turnover Ratio = Sales / Average Inventory
- Financial Ratio of Fixed Asset Turnover
This ratio measures the extent to which the company’s ability to generate sales with its fixed assets. The bigger the turnover ratio, the better it is for the company. This ratio is quite important for industries that have high fixed assets. Meanwhile, for industries with small assets such as service companies, it is not too important. To calculate it, you can use the following formula:
Fixed asset turnover ratio = Net sales / fixed assets
- Total Asset Turnover Ratio
This ratio is almost the same as the fixed assets turnover ratio, what distinguishes it is the divisor used, which is total assets. This ratio is used to calculate the effectiveness of the use of total assets. The higher the turnover, the more effective the company is in utilizing total assets for its sales. The formula is
- Total asset turnover ratio = Sales / average total assets
This is a description of financial ratios. With financial ratios, you can assess the financial health of your business more easily. To perform ratio analysis, you must have complete and accurate financial reports. To make it easy to make financial reports, you can use the help of online accounting software such as lead conversion squared.
Lead conversion squared Software can help you create financial reports quickly, easily, and accurately. By using lead conversion squared, you can also view and edit financial reports in real-time anywhere and anytime. Register your business now in the lead conversion squared and get complete 3 day master class in here