How to Analyze Financial Ratios

I wish I had learned this framework earlier in my career, when I was a Staff Accountant. At the time, I was booking journal entries and putting reconciliation schedules together from one month-end to the next. I remember finding things I thought management should be worried about but nobody seemed to listen when I would bring them up. Well now, I know that if I was applying this buy-in framework, things would have been much different. So if you want to be the go-to person for strategic recommendations in your organization and help others do the same, do these 4 things consistenly. 𝟏 - 𝐆𝐞𝐭 𝐃𝐚𝐭𝐚 𝐟𝐨𝐫 𝐁𝐞𝐧𝐜𝐡𝐦𝐚𝐫𝐤𝐢𝐧𝐠 Get in the habit of reading other companies’ financial statements and audit reports, especially if they are within your industry. [ Hint: Public companies and large not-for-profits usually have their financial statements available online. ] Start by downloading these documents and diving into the details. Comparing different companies’ financials will give you a broader industry perspective. 𝟐 - 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐊𝐞𝐲 𝐑𝐚𝐭𝐢𝐨𝐬 Use the financial data to calculate essential ratios like current ratio, debt-to-equity ratio, and return on equity. These metrics are critical for benchmarking against industry standards and understanding where your company stands relative to others. How do you know that your current profit margin makes sense if you don't know the bigger picture? 𝟑 - 𝐀𝐧𝐚𝐥𝐲𝐳𝐞 𝐊𝐏𝐈𝐬 Identify and track key performance indicators (KPIs) such as revenue growth and operating cash flow. Compare these metrics with those of other companies in the industry to gain insights and identify best practices. 𝟒 - 𝐂𝐨𝐧𝐯𝐞𝐫𝐭 𝐃𝐚𝐭𝐚 𝐭𝐨 𝐈𝐧𝐬𝐢𝐠𝐡𝐭𝐬 Use the following framework to turn your analysis into actionable insights and get buy-in on your recommendations: > Observation: What does the data show? (i.e., "Revenue growth has slowed over the last two quarters.") > Analysis: Why is this happening? (i.e., "This could be due to increased competition and higher production costs.") > Implication: What does this mean for the business? (i.e., "If the trend continues, it could impact our profitability and market share.") > Recommendation: What should be done next? (i.e., "We should explore cost-cutting measures and evaluate new market opportunities to boost revenue.") By following this framework, you not only leverage your company’s data but also incorporate industry benchmarks to provide context. This helps stakeholders understand the broader landscape, see the implications clearly, and align with your recommendations, especially if you use an easy-to-understand format. What do you think?

Your numbers may look good, but banks still won't lend to you.   Why? You’re missing crucial financial ratios. Without financial ratios, you’re navigating in the dark.  You can’t fully assess your company's health: - Can you meet long-term obligations?   - Is your profitability strong?   - How’s your cash flow? This uncertainty impacts every decision: - Should you expand?   - Can you afford new equipment?   - Are you competitive in your industry? Without clear answers, you’re left guessing. I’ve helped many businesses take control of their finances, and here’s my step-by-step guide to mastering financial ratios: 1. Identify key ratios for your industry   2. Gather accurate data   3. Calculate ratios monthly   4. Compare to industry benchmarks   5. Set improvement goals   6. Monitor trends over time Following this process gives you crystal-clear insights.  You’ll spot strengths to leverage and weaknesses to fix.  Banks will view you as a lower risk, and investors will see your potential. Understanding your ratios isn’t just about impressing others, it's about empowering you to make smarter decisions for your business’s future. #financialratios  #businessandaccounting   #finance

Decoding Financial Health in 5 Key Areas Ratio analysis is a powerful tool for investors, analysts, and business owners alike, offering a quantitative window into a company's financial performance. By examining relationships between various financial figures, ratios uncover hidden insights that go beyond raw numbers. Let's dive into the five essential types of ratios that illuminate different facets of a company's financial health: 𝟏. 𝐋𝐢𝐪𝐮𝐢𝐝𝐢𝐭𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐂𝐚𝐧 𝐘𝐨𝐮 𝐏𝐚𝐲 𝐘𝐨𝐮𝐫 𝐁𝐢𝐥𝐥𝐬?" 𝐓𝐞𝐬𝐭 Focus: Short-term debt payment ability Key Ratios: Current Ratio, Quick Ratio Insight: How easily can a company cover immediate debts with available cash and assets? A higher ratio signals stronger liquidity. 𝟐. 𝐒𝐨𝐥𝐯𝐞𝐧𝐜𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐋𝐨𝐧𝐠-𝐓𝐞𝐫𝐦 𝐒𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲" 𝐂𝐡𝐞𝐜𝐤 Focus: Long-term debt management and financial risk Key Ratios: Debt-to-Equity Ratio, Interest Coverage Ratio Insight: Is a company overly reliant on borrowed money? Can it comfortably meet long-term obligations? Lower ratios generally indicate better solvency. 𝟑. 𝐏𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐌𝐚𝐤𝐢𝐧𝐠 𝐌𝐨𝐧𝐞𝐲" 𝐌𝐞𝐭𝐞𝐫 Focus: Earnings generation effectiveness Key Ratios: Gross Profit Margin, Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE) Insight: How efficiently is a company turning sales into profit? How well are assets and investments generating returns? Higher ratios indicate better profitability. 𝟒. 𝐄𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐜𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐑𝐞𝐬𝐨𝐮𝐫𝐜𝐞 𝐎𝐩𝐭𝐢𝐦𝐢𝐳𝐚𝐭𝐢𝐨𝐧" 𝐆𝐚𝐮𝐠𝐞 Focus: Resource utilization for sales and profit Key Ratios: Inventory Turnover Ratio, Accounts Receivable Turnover Ratio, Days Sales Outstanding (DSO) Insight: How quickly does inventory sell? How fast are receivables collected? Efficient operations are key to maximizing profitability. 𝟓. 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐒𝐭𝐨𝐜𝐤 𝐌𝐚𝐫𝐤𝐞𝐭 𝐕𝐚𝐥𝐮𝐞" 𝐂𝐨𝐦𝐩𝐚𝐬𝐬 Focus: Stock value relative to earnings or assets Key Ratios: Price-to-Earnings Ratio (P/E Ratio), Price-to-Book Ratio (P/B Ratio) Insight: Is a company's stock underpriced, overpriced, or fairly valued compared to its financial performance or book value? Each type of ratio contributes a unique perspective, allowing you to piece together a comprehensive picture of a company's financial health. You can identify trends, strengths, weaknesses, and potential risks by comparing ratios across different periods, industries, or competitors. Ratios are most informative when used in combination and interpreted within the broader context of a company's operations and industry landscape. Want to discuss how fractional CFO services can support your future growth? Schedule a meeting with me directly here:https://lnkd.in/ehiZ-VUT. I look forward to ourconversation.