In this article, “What is Financial Ratio Analysis?” We tried to compile the answer to the question for you. Financial resources are one of the most important resources that businesses should have in order to continue their activities. Financial ratio analysis enables businesses to analyze their indebtedness, operating performance, resource utilization performance, and cash flow performance. By examining the relationship between two or more financial data, financial analysis, which enables businesses to have information about their performance in certain areas, can yield results that can reveal what businesses can do and their capacities to achieve their strategic goals when they are carried out with real balance sheet items and when different ratios are evaluated together.
In this context, liquidity ratios, financial structure ratios, activity ratios, and profitability ratios enable decision-makers to have an idea about the status of businesses. While liquidity ratios measure the ability of businesses to fulfill their short-term obligations, they guide businesses, especially in short-term steps. In addition to this, activity ratios enable businesses to view all their liabilities as well as short-term liabilities, thus allowing them to evaluate their decisions with a longer-term perspective. Activity ratios are used to analyze how efficiently businesses use their assets. When evaluated together with value chain analysis, it can enable businesses to discover weaknesses that they can correct and strengths that they can improve. Profitability ratios are used to analyze the ability of businesses to generate income.
Why is Financial Ratio Analysis Performed?
It is inevitable to invest in human resources, basic resources, technology, and R&D in order to adapt to changing environmental conditions and to make success sustainable. However, investments to be made by ignoring the situation in financial resources may lead businesses to failure rather than success. Based on the assumption that financial goals must be achieved first in order to achieve long-term goals in applications such as balanced scorecards and OKR, financial data should be evaluated accurately, and these ratios should shed light on short and long-term decisions. Therefore, before making a new decision, a new investment, the indebtedness of the enterprise and its ability to pay these debts, whether the existing capacity is used efficiently before making an extra capacity investment, whether the enterprises will be burdened from time to time in long-term investments, whether the investments to be made will add to the current profitability. Factors such as strategic decision alternatives to be taken in this direction should be re-evaluated in the light of financial ratio analysis carried out with real balance sheet items.
How is the Financial Ratio Calculated?
There are ratio formulas applied as a global standard to perform financial ratio analysis:
Liquidity Ratios
Current Ratio = Current Assets / Short-Term Liabilities
Acid-Test Ratio = (Current Assets – Inventories) / Short-Term Liabilities
Cash Ratio = (Liquid Assets + Securities) / Short-Term Liabilities
Inventory Dependency Ratio = (Short-Term Liabilities – (Liquid Assets + Securities)) / Inventories
Financial Structure Ratios
Leverage Ratio = Short and Long-Term Liabilities / Total Assets
Financing Ratio = Equity / Short and Long-Term Liabilities
Debt / Equity Ratio Short and Long-term Foreign Resources / Equity
Auto-Financing Ratio = (Profit Reserves – Past Years Losses) / Paid-in Capital
Earnings Number = Profit Before Interest and Taxes / Financing Expenses
Tangible Fixed Assets / Equity Ratio = Tangible Assets / Equity
Fixed Assets / Perpetual Capital Ratio = Fixed Assets / (Long-term Liabilities + Equity)
Perpetual Capital Dependency Ratio = (Inventories + Trade Receivables – Trade Payables) / Perpetual Capital
Activity Rates
Receivable Turnover Rate = Net Sales with Credit / Trade Receivables
Average Collection Time = 360 / Credit Turnover Rate
Tangible Assets Turnover Rate = Net Sales / Net Tangible Fixed Assets
Inventory Turnover Cost = Cost of Sales / Average Stock
Inventory Change Time = 360 / Inventory Turnover
Asset Turnover = Net Sales / Total Assets
Trade Payable Turnover = Cost of Sales / Average Trade Payables
Profitability Ratios
Financial Profitability = Financial Profit / Average Equity
Economic Profitability = Earnings Before Tax and Interest / Total Liabilities
Return Per Share = Net Profit / Number of Stocks in Circulation
Business Volume Profitability = Operating Profit / Net Sales
Gross Sales Profitability = Gross Sales Profit / Net Sales
Current Asset Availability = Net Profit / Current Assets
Cumulative Profitability Ratio = Retained Profit / Total Assets
The averages obtained as a result of the ratios used in the financial ratio analysis should be evaluated according to the sectoral averages. According to the dynamics of the sectors, sector averages may differ. Therefore, apart from the standards set for financial ratios, sector dynamics should also be taken into account. In this respect, the sector averages announced by the CBRT provide businesses with an opportunity to interpret the results of their analysis.
In addition, financial ratios alone may not be effective in decision-making. Evaluating the obtained results together with other ratios and interpreting them together with the comparative balance sheet analysis will always give healthier results.
Financial Ratio (Ratio) Scenario Analysis in STRATEJİ360
In STRATEJİ360, the financial ratio scenario analysis has been prepared by considering the sector dynamics. In the analysis application prepared in the light of CBRT data, the results of the enterprises are interpreted by comparing them with the 10-year sector averages of the CBRT. In this way, the company finds the opportunity to compare itself with the sector in financial terms.
In addition, in the application prepared by eliminating the complex structure, it is sufficient to enter only the items needed for the ratios into the system rather than all balance sheets and financial reports. Since the application also allows enterprises to enter data more than once to analyze different scenarios, it can enable enterprises to analyze situations related to different scenarios.
