Financial ratios advantages

The relative indicator (ratio) is the ratio of two or more indicators. The relative indicator (ratio) is obtained by comparing two or more absolute indicators and is much better than an absolute indicator.

Relative indicators (ratios) evaluate the object in question more objectively and comprehensively than the absolute indicators would. If two companies of the same industry, profile and size received 0.5 million dollars in profit, it cannot be inferred that both companies were equally profitable. Which company acts more profitably, can only be told when the profit indicator of both companies will be compared with sales, assets, capital and other indicators? The relative indicator (ratio) allows comparing the results between differences sizes enterprises.

Grouping of financial ratios

The financial statement makes it possible to calculate a lot financial ratios, so that they are appropriate to organize or unite into certain groups. Combining the indicators into homogeneous groups facilitates the work of analysts and auditors.  The information becomes easier to select for consumers. It becomes easier to understand who financial ratios are more appropriate for wider operational decisions and which – for management decisions. Different financial ratios classifications can be found in various sources.

How to use financial ratios: the initial advice

Every economics sophomore already knows that there is such an instrument as financial indicators (financial ratios). We are guessing that the majority understands about their usefulness. It would seem that relative financial indicators can enjoy a global recognition among the economic-financial services workers, who once were also sophomores.

However, to have and to use the knowledge isn't the same. Why we are remembering this old topic?

The long-term experience has led to a strange conclusion from the first sight: very often complex financial situations are possible to be resolved using simple solutions.