Financial Analysis: Analysis And Definition Of Financial Ratios
Definition
The financial ratios or financial indicators are coefficients or reasons that provide financial and accounting units of measurement and comparison, through which, the ratio (division) together two data direct financial, allow analyzing the state current or past an organization to function at optimum levels defined for it.
The Financial Ratios are comparable with those of the competition and lead to analysis and reflection of the performance of companies against their rivals, then the fundamentals of application and explained the calculation of each.
History
Analysis Financial Ratios, Indices, Reasons or ratios, was one of the first tools developed of Financial Analysis.
In the early nineteenth century, the use by analysts of financial
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.
Objective Of Financial Ratios
The objective of the analysis of financial statements is to simplify the figures and their relationships and make possible comparisons to facilitate their interpretation.
By interpretation, it is meant to give meaning to the financial statements and determine the causes of facts, unfavorable and favorable trends surveyed by analysis of the financial statements so that the negative effects for business can be avoided.
Methods Of Financial Ratios
The ratio analysis is the starting point for developing the information, which can be classified into 4 groups as
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Gross profit margin (Mb): Indicates the percentage of sales remaining after the company has paid its stocks. MB = Sales - Cost of goods sold Sales
Operating Profit Margin (Mo): Represents the net profits the company earns on the value of each sale. These must be taken into account by deducting financial or governmental charges and determines only the company’s operation.
Net profit margin (Mn): Determines the percentage remaining in each sale after deducting all expenses as well as taxes.
Total asset turnover (Rat): Indicates the efficiency with which the company can use its assets to generate sales. RAT = Annual Sales total assets
Return on Investment (REI): Determines the administration’s overall effectiveness to make a profit with the available
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