Perspective - Journal of Finance and Marketing (2023) Volume 7, Issue 4

Financial analysis: Understanding key ratios and metrics.

Department of Accounting and Finance, Complutense University of Madrid, Madrid, Spain

*Corresponding Author:

Souto Lopez
Department of Accounting and Finance
Complutense University of Madrid, Madrid, Spain
E-mail: lop.sou@ccee.ucm.es

Received: 22-Jul-2023, Manuscript No. AAJFM-23-113844; Editor assigned: 26-Jul-2023, PreQC No. AAJFM-23-113844 (PQ); Reviewed: 08-Aug-2023, QC No. AAJFM-23-113844; Revised: 17-Aug-2023, Manuscript No. AAJFM-23-113844 (R); Published: 22-Aug-2023, DOI:10.35841/aajfm-7.4.188

Citation: Lopez S. Financial analysis: Understanding key ratios and metrics. J Fin Mark. 2023;7(4):188

Introduction

Financial analysis is the process of evaluating a company's financial health by analysing its financial statements, ratios, and metrics. It helps investors and stakeholders make informed decisions about the company's profitability, liquidity, and solvency. In this article, we will discuss the key ratios and metrics that are commonly used in financial analysis and how they can be interpreted to gain insights into a company's financial performance. Financial analysis is an essential tool for evaluating a company's financial health. It provides investors and stakeholders with insights into a company's profitability, liquidity, and solvency. Financial analysis involves analyzing financial statements, ratios, and metrics to understand a company's financial performance. This helps investors and stakeholders make informed decisions about the company's future prospects. In this article, we will discuss the key ratios and metrics that are commonly used in financial analysis and how they can be interpreted to gain insights into a company's financial performance [1].

Liquidity ratios- Liquidity ratios measure a company's ability to meet its short-term obligations. These ratios indicate whether a company has sufficient cash and cash equivalents to pay its current liabilities. The two most commonly used liquidity ratios are the current ratio and the quick ratio. The current ratio is calculated by dividing a company's current assets by its current liabilities. A current ratio of 2 or higher is generally considered good, as it indicates that the company has sufficient current assets to cover its current liabilities. The quick ratio, also known as the acid-test ratio, is calculated by dividing a company's current assets minus its inventory by its current liabilities. This ratio measures a company's ability to pay its current liabilities using only its most liquid assets. A quick ratio of 1 or higher is generally considered good [2].

Profitability ratios- Profitability ratios measure a company's ability to generate profits relative to its revenue, assets, and equity. These ratios indicate how effectively a company is using its resources to generate profits. The two most commonly used profitability ratios are the gross profit margin and the net profit margin. The gross profit margin is calculated by dividing a company's gross profit by its revenue. This ratio measures the percentage of revenue that remains after deducting the cost of goods sold. A higher gross profit margin indicates that the company is generating more profit per dollar of revenue. The net profit margin is calculated by dividing a company's net profit by its revenue. This ratio measures the percentage of revenue that remains after deducting all expenses, including taxes and interest. A higher net profit margin indicates that the company is generating more profit per dollar of revenue after deducting all expenses [3].

Solvency ratios- Solvency ratios measure a company's ability to meet its long-term obligations. These ratios indicate whether a company has sufficient assets to cover its long-term debt. The two most commonly used solvency ratios are the debt-toequity ratio and the interest coverage ratio. The debt-to-equity ratio is calculated by dividing a company's total debt by its total equity. This ratio measures the amount of debt relative to equity in a company's capital structure. A lower debt-to-equity ratio indicates that the company has a lower amount of debt relative to equity, which is generally considered good. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense. This ratio measures a company's ability to pay interest on its debt using its earnings before interest and taxes. A higher interest coverage ratio indicates that the company is generating sufficient earnings to cover its interest expense. Financial analysis is a crucial tool for evaluating a company's financial health. By analysing financial statements, ratios, and metrics, investors and stakeholders can gain insights into a company's profitability, liquidity, and solvency [4,5].

References

1. McAlister L, Sinha S. A customer portfolio management model that relates company’s marketing to its long-term survival. J Acad Mark Sci. 2021;49(3):584-600.

Indexed at, Google Scholar, Cross Ref

2. Zhan M, Chen Y. Vehicle Company’s decision-making to process waste batteries: A game research under the influence of different government subsidy strategies. Int J Environ Res Public Health. 2022;19(21):13771.

Indexed at, Google Scholar, Cross Ref

3. Zambrano Farías FJ, Martínez MD, Martín-Cervantes PA. Profitability determinants of the natural stone industry: Evidence from Spain and Italy. Plos one. 2022;17(12):e0276885.

Indexed at, Google Scholar, Cross Ref

4. Ben-Gal HC, Forma IA, Singer G. A flexible employee recruitment and compensation model: A bi-level optimization approach. Comput Ind Eng. 2022;165:107916.

Indexed at, Google Scholar, Cross Ref

5. Tarjo T, Anggono A, Yuliana R, et al. Corporate social responsibility, financial fraud, and firm's value in Indonesia and Malaysia. Heliyon. 2022;8(12):e11907.

Indexed at, Google Scholar, Cross Ref