Financial Ratio Analysis | Importance of Financial Ratios | Motilal Oswal financial analysis of a company

“Financial ratio analysis and let us understand the importance of financial ratios. We all have already learned how to analyze the financial statements balance sheets and cash flow statements but how can we know if a company is better than its peers or not. Is it really possible to know if a company is better or worse than its peers? the answer is yes for that.
We need to conduct financial ratio analysis which is arrived at by inferring data from the financial statements which would give us a meaningful conclusion about the company. The data from the financial statements are converted into financial metrics that would assist in the decision-making process. Consider these like a key performance indicator or an indicative number on which any company’s performance is measured. It also helps us to evaluate different companies or even specific areas within a company on a common measure which is comparable.
So, let’s get started on how to analyze some of these financial ratios. To begin with financial ratios can be majorly classified into four categories, first is the return ratios these are the ratios which represent the return that the company generates or can generate return for its shareholders. It basically shows whether a company is utilizing its equity and debt capital efficiently in order to be profitable and generate returns for its shareholders. Some of the return ratios include return on equity that is ROE, return on capital employed that is ROCE and return on assets that is ROA.
Second is the efficiency ratios, the efficiency ratio basically shows us how the company is utilizing its assets and liabilities internally. It measures the ability of a company to use its assets and generate income. It checks a variety of measures of a company such as the time it takes to churn cash from its status or the time it takes to convert inventory into cash.
This makes the financial ratio an important one as an improved efficiency ratio which ultimately translates into better operational efficiency and gross profits, examples are asset turnover ratio, working capital, cycle days of receivables etc.
Third is the solvency ratios, the solvency ratio is an important tool to measure a company’s financial ability and strength. It basically shows whether the company has enough assets to pay off the borrowings or debt, which it has taken from external sources. Examples are debt equity ratio, interest coverage ratio etc.
Fourth is the valuation ratios, valuation ratios are one of the most important ratios used in financial ratio analysis. It enables us to get an idea of how the market is valuing the company with respect to its peers valuation ratio, is a pure comparative ratio as it can only be assessed when compared with its immediate peer or the broader sector. Few examples of valuation ratios are p/e ratio, ebitda ratio, market cap by sales ratio etc. Watch the complete video to get detailed information on financial ratio analysis. Thank you.

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Financial Ratio Analysis | Importance of Financial Ratios | Motilal Oswal
financial analysis of a company
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