What are financial ratios?

The concept of financial ratios, also known as financial indicators, are relative magnitudes of two numerical values ‚Äč‚Äčtaken from the financial statements Of a company. It is often used in accounting for the purpose of analyzing the global financial situation of a company.

Another meaning of financial ratios can be the indices that reflect the financial reality of a business, based on the different variables that participate in it.

There are financial reasons aimed at studying the profitability of the company, both with regard to the satisfaction expectations section and the historical one in order to specify the most convenient actions to develop to achieve improvements in business management. This tool is presented as a valuable information tool to establish the financial direction of the company.

Among the main financial statements used to develop these indicators are the Statement of Situation (Balance sheet) and the Income Statement (Profit and loss accounts).

The main financial ratios

There is a wide variety of financial ratios, from those that only measure liquidity, to those that manage to project the certainty of the company's permanence in the coming years. In any case, among the different possibilities there are three reasons that can define the real situation of any company, such as:

  • Liquidity: measures the level of solvency that a company has to assume its obligations and commitments.
  • Profitability: analyzes the behavior of the company in terms of satisfying investors' expectations.
  • Indebtedness: check the degree of tolerance that the company has to satisfy the different financial obligations.

Interpretation of financial ratios

The interpretation of the different indicators is carried out according to comparative financial behavior, with three possible perspectives.

  • With the same company.
  • From one company to another.
  • Industry average.

In general, given the scarce information that exists globally, it is advisable to take as a reference the individual objectives of the company, as well as to track in nearby environments and sectors.

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