Financial Ratio Analysis Explained in 3 minutes
Sometimes it's not enough to simply say a company is in "good or bad" health… To make it easier to compare a company's health
with other companies, we have to put numbers on this health, so that we can compare these
numbers with the numbers of other companies… So now… how do we use numbers to assess
company health? This is where Financial Ratios come in…
Very common types of financial ratios are
Liquidity Ratios, Profitability Ratios, and Leverage Ratios. Liquidity Ratios can tell us how easily a
company can pay its debts… so that the company doesn't get eaten up by banks or other creditors. An example of this is the Current Ratio… This tells us how much of your company's stuff
can be easily changed into cash within the next 12 months so that it can pay debts which
need to be paid also within 12 months.
The higher your current ratio is, the less
risky a situation your company is in. Now moving on… Profitability Ratios can tell us how good
a company is at making money. An example of this is the Profit Margin Ratio. This tells us how much profit your company
earns compared to your company's sales. Normally, a higher number is better; because
you want to earn more profit for every $1 of sales that you get. And finally, what about Leverage Ratios? These can tell us how much debt the company
is using to make the company run and stay alive. An example of this is the simple Debt Ratio. This tells us how much % of a company's assets
are paid for by debt.
Normally, a company is considered "safer"
when the debt ratio is low. Note that this was just a very simple overview. There are a lot more financial ratios & many
different ways of using them; plus a lot of problems and disadvantages in using them as
well. Would you like to SUPER easily learn more
about many financial ratios with even deeper analysis & detail? Check out my FREE videos at MBAbullshit.com
See ya there!.