Financial Ratios

Financial Ratios

The financial statements report the activities that have been carried out by the company in a certain period. Activities that have been carried out are outlined in numbers, both in the form of small currencies and foreign currencies.

The numbers contained in the financial statements become less meaningful if only seen one side only. It means if only by seeing what it is. These numbers will become more if we can compare one component to another. The trick is to compare the numbers in the financial statements or between financial reports.

After making a comparison, it can be concluded the financial position of a company for a certain period. In the end we can assess the performance of management in that period. This comparison is known as financial ratio analysis.

The uniqueness ratio according to James C Van Horne is an index that connects two accounting numbers and is obtained by dividing one number by another number. Financial ratios are used to evaluate financial condition and company performance. From the results of this financial ratio will be seen the health condition of the company concerned.

So we can conclude that financial ratios are activities comparing the numbers in the financial statements by dividing one number with another number. Comparisons can be made between one component with the components in one financial statement or between components that exist between financial statements. Then the numbers being compared can be numbers in one period or several periods.

The results of these financial ratios are used for management performance in a period whether reaching targets as set. Then also can be assessed the ability of management in effectively empowering company resources.

From the resulting performance can also be used as an evaluation of things that need to be done in the future so that management performance can be improved or maintained in accordance with company targets. Or the policy that must be taken by the owner of the company to make changes to the people who sit in future management.

In practice, an analysis of a company's financial ratios can be classified into 3 viz

1. Balance sheet ratio, which compares numbers that only come from the balance sheet

2. The income statement ratio, which compares numbers that only come from the income statement

3. The ratio between reports, which compares numbers from two sources both in the balance sheet and in the income statement

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