Accounts receivable turnover ratio= Net sales / Average Accounts Receivables.Total Asset Turnover ratio= Net sales/ total assets.Annual inventory turnover ratio= Cost of good sold/average inventory.Outside the company: Financial analysts, security analysts, competitors, investors, creditors, tax and regulatory authorities.Within the company: Founders, management team, and employees.A competent financial analyst will refer to a good mix of ratios before arriving at any conclusion.įinancial ratios are primarily used by two categories of people: However, considering a stand-alone ratio can be misleading. This helps management spot problematic areas in the very early stages. These ratios are derived by dividing one financial measurement by the other.įinancial ratios serve as an important tracking tool for identifying trends and discrepancies in the company’s finances. In simple terms, financial ratios are the relationship established between various statistical data provided in the company’s financial documents such as the balance sheet, income statement, cash flow statements, etc. As important as they are as a document, the numbers in these statements alone are not capable of indicating any underlying issues, risk trends, or a probable future performance, unless they are analyzed properly. The performance of a business is ultimately reflected in their periodic financial statements. We have also compiled a comprehensive database of the IRS financial ratios by industry which will act as quick reference for your respective businesses. In this article, we will explore the idea of financial ratios with a deeper insight into some of the basic types of ratios. Analysts, investors, creditors, and all other lending institutions rely on these ratios to gauge a company’s footing in the business. Financial ratios are the cornerstone of any company valuation.
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