Ratios for Financial Reports Analysis

Activity Ratios

Suppose you want to know how efficiently a company performs. In that case, you should look at its activity ratios, which measure how well and how efficiently a company manages various activities, specifically its assets. There are many indicators to measure activity ratios, like inventory turnover, receivables turnover, payables turnover, total asset turnover, etc. Picture 1 shows the indicators and their numerator and denominator.

Picture 1

Liquidity Ratios

If you want to know a company's ability to meet its short-term obligations, you should consider its liquidity ratios. It measures how quickly assets are converted into cash. Liquidity ratios also measure the ability to pay off short-term obligations. In day-to-day operations, liquidity management is typically achieved through the efficient use of assets. In the medium term, liquidity in the non-financial sector is also addressed by managing the liabilities structure.

Like the activity ratio, liquidity ratios also contain several indicators, shown in picture 2.

Picture 2

Solvency Ratios

The solvency ratio refers to a company's ability to fulfill its long-term debt obligations. Assessment of a company's ability to make interest and principal payments includes analyzing its financial structure. Solvency ratios provide information pertaining to the debt held by the company, as well as how adequate the earnings and cash flow are in order to cover interest expenses, along with other charges.

The picture below shows the indicators of solvency ratios.

Picture 3

Profitability Ratios

The last ratio is profitability ratios. It is most popular among investors and analysts because the ability to generate profit on capital invested is a crucial determinant of a company's overall value and value of the securities it issues. It tells a company's competitive position in the market, even its management quality during a period.

Many indicators can measure a company's profitability, like gross profit margin, operating profit margin, net profit margin, etc. The picture below shows its core indicators and calculation.

Picture 4