The management of any given income-generating firm needs to run surveys aimed at gauging the monetary progress of the firm.
The findings of the survey help in decision-making or as motivators to the realization of full potential within the available possible means. These findings however do little in comparing the firm with its competitors or set goals hence the need for financial performance ratios identification.
These ratios come from a detailed comparison of different financial statements that include dividing relevant statements. A complete analysis requires dedication of expertise and time since there are many factors to consider when collecting the data to run a comprehensive fiscal survey. This is an expensive but necessary part of management auditing that should be done in economically conscious frequencies in a fiscal year.
However, there are some financial performance ratios that can be termed as “usual suspects” since they have to be analyzed every now and then to give a basis for productive institution management.
Liquidity ratio describes the present ability of a firm to meet the short-term requirements sufficiently. This is a measure of cash in the organization and has different subgroups like Current
Ratio, Quick Ratio and others.
Second on the list is the Asset Turnover Ratio that indicates how efficient the firm is in transforming assets at its disposal into market goods. The ratio comprises of receivables turnover, collection period that indicates how fast debtors settle their dues and the trust value attached to a specific debtor, the inventory turnover that monitors how efficiently a firm is generating its selling products and the inventory turnover period.
Financial leverage ratio is another member of the financial performance ratios that management should hold close to heart to avoid losses in any fiscal year. It comprises of debt ratio, which apart from giving an insight of interest bearing debt also shows long-term solvency of the organization, and the debt-equity ratio that calibrates the contribution of lenders for each unit of contribution given by
the firm owner(s).
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Finally, we have the profitability ratios that show the nature amount of revenue the firm in question is generating.
It comprises of the net profit margin, return on equity and the gross profit margin whose sole purpose is to indicate the efficiency levels of the firm in producing each unit of its market product.
Financial performance ratios, each of which requires unique calculation formulas with a common platform of dividing one factor with another, are important in the analysis and prediction of market trend and understanding the Stock Market.
This, apparently, is what internal and external investors are out for before digging into their pockets to finance firm operations.