What is the importance of ratio of financial statements?

Ratio analysis is important to measure the performance, to compare the previous trends, to know the financial heath of business, to focast next year

 

Ratio Analysis is important in planning and financial management are the keys to running a financially successful small business. Ratio analysis is critical for helping you understand financial statements, for identifying trends over time and for measuring the overall financial state of your business.

 

I agree with previous answers. Ratio analysis is crucial for  "early warning system" of each company. The next question is: Can we properly interpret the results and ratios.

Ratio analysis is an important tool for analyzing the company's financial performance.

Ratio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as investors,management. bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose.

It helps the managment to evaluate the company performance and it helps the management to compare with the previous years and forecast the next period

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The importance of ratio of financial statements:

Ratio analysis is an important tool for analyzing the company's financial performance. The following are the important advantages of the accounting ratios:

1. Analyzing Financial Statements

Ratio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as investors, management. bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose.

2. Judging Efficiency

Accounting ratios are important for judging the company's efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits.

3. Locating Weakness

Accounting ratios can also be used in locating weakness of the company's operations even though its overall performance may be quite good. Management can then pay attention to the weakness and take remedial measures to overcome them.

4. Formulating Plans

Although accounting ratios are used to analyze the company's past financial performance, they can also be used to establish future trends of its financial performance. As a result, they help formulate the company's future plans.

5. Comparing Performance

It is essential for a company to know how well it is performing over the years and as compared to the other firms of the similar nature. Besides, it is also important to know how well its different divisions are performing among themselves in different years. Ratio analysis facilitates such comparison.

 

1.Versatility and Usefulness

Ratios are critical quantitative analysis tools. One of their most important functions lies in their capacity to act as lagging indicators in identifying positive and negative financial trends. The information a trend analysis provides allows to you to make and implement ongoing financial plans and, when necessary, make course corrections to short-term financial plans. Ratio analysis also provides ways for you to compare the financial state of your business against other businesses within your industry or between your business and businesses in other industries. The sheer numbers of available financial ratios makes it important to research and choose ratios most applicable to your business.

2. Common Size Comparison Ratios

Balance sheet common size ratios are important for making comparisons of assets and liabilities. These financial ratios focus on calculating each asset on the balance sheet as a percentage of total assets and each liability as a percentage of total liabilities plus owner’s equity. Calculating and comparing common size ratios for corresponding reporting periods in two consecutive years helps you identify trends such as decreasing cash and increasing accounts receivable balances. Financial planning goals might then include strengthening your accounts receivable collection policy and tightening credit-granting guidelines.

3. Turnover and Efficiency

Operating expense and turnover ratios are critical for helping you assess how efficiently your business is utilizing assets and managing liabilities. An operating expense ratio compares operating expenses such as rent, inventory purchases and advertising to sales revenue. While a low ratio indicates your business is managing expenses successfully, a high ratio signals a need to course-correct ongoing financial plans. Turnover ratios typically need deeper analysis, with both extraordinarily high and low ratios indicating a cause for concern. For example, a high inventory turnover ratio indicates a need to review the inventory budget, because your business could be losing sales due to frequent stock-outs.

4. Cash and Liquidity

Cash and liquidity ratios help determine whether you can afford to invest in capital assets or long-term business growth. A current and working capital ratio both are useful for assessing whether your business has enough liquidity to pay for daily operating and short-term debt expenses. For instance, a current ratio compares current assets to current liabilities. A ratio of 3 to1 indicates your business is sufficiently liquid. At this point, you can begin incorporating capital or market investments into your financial plan.

The importance of the lists (reports) Financial:

 

1. Provide the necessary information to the needs of the main beneficiaries that will help them assess entity's ability to generate cash flows that help to predict its continuation and achieved positive results.

2. periodic measurement of income for the facility.

3. Provide information to help assess enterprise's ability to generate cash flow as the facility continues to operate and divided her life into periodic intervals for the preparation of financial statements Mstkhaddmts the accrual basis.

4. provide information on available sources of funds for the facility and how to use these funds.

5. provide information on cash flows (such as loans to and from the facility, angel investments, distributions)

 

And it is considered the financial reporting of the final product for accounting and reporting is divided into two sections:

• Special Reports: The response given to the request (for inventory, inventory of fixed assets, .....)

• General reports: Prepare according to generally accepted accounting standards for the information of all a related facility or all interested Bomorha (h / trading, h / O.kh, the balance sheet)

These reports may be sufficient familiar with them or answer his questions about the property and may require further analysis and comparison to get to know the reality established more accurately and this is done through the menus analysis.