Types of Ratios in Analyzing Financial Statements

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To be able to get a picture of a company's financial development, it is necessary to conduct an analysis or interpretation of financial data from the company concerned, where the financial data is reflected in the financial statements. A measure often used in financial analysis is the ratio.

Financial statements are made so that important use can be used in analyzing the economic health of the company. According to Kown (2004; 107):

"The results of analyzing financial statements are financial ratios in the form of numbers and financial ratios must be able to answer questions".

Financial Statement Analysis involves checking the relationship of the numbers in the financial statements and the trend of numbers over several periods, one goal of financial statement analysis is to use past company performance to estimate how it will happen in the future.

According to Van Horne (2005: 234):
"Financial ratios are the tools used to analyze the financial condition and company performance. We calculate various ratios because in this way we can get comparisons that might be useful than the various raw numbers themselves ".

Although the ratio analysis can provide useful information in connection with the operating conditions and financial condition of the company, there is also an element of the limited information that requires caution in considering problems in the company.

According to Kown (2004: 108): Financial ratios can provide at least four answers to questions, namely:

What is Company Liquidity
Does Management effectively generate operating profit on assets
How the company is funded
Do ordinary shareholders get a rate of return sufficient.

This is due to the difficulty of getting the right comparison for companies operating several different divisions in different industries.

As one form of relevant information and effective use in analyzing ratios in decision making. In conducting analysis, the analyzer can use two kinds of comparisons namely:

Comparing current ratios with past ratios or with ratios predicted for the future time from the same company.
Comparing the ratio of companies with similar ratios with other similar companies, and at the same time.

According to Van Horne's data source (2005: 234): Ratio figures can be distinguished on:

1. Ratios (Balance Sheet Ratios), i.e. ratios compiled from data derived from the balance sheet, for example, current ratios, acid test ratios, current assets to total asset ratios, current liabilities to total asset ratios and so forth.

2. Ratio - Income Statement Ratio, is data compiled from data derived from income statements, such as gross profit, net margin, operating margin, operating ratio and so on.

3. Ratios between Financial Statements (Internal Statement Ratio), are ratios compiled from data derived from the balance sheet and other data derived from income statements, such as asset turnover, Inventory turnover, receivable turnover, and so forth.

Financial ratios can be divided into three general forms that are often used, namely: Liquidity Ratios, Solvency Ratios, and Profitability Ratios

1. Liquidity Ratio (Liquidity Ratio)

It is a ratio used to measure a company's ability to meet short-term financial obligations in the form of short-term debt (short time debt).

According to Van Horne: "A good expenditure system Current ratio must be at the limit of 200% and Quick Ratio at 100%". As for the members of this ratio are:

a. Current Ratio

It is a ratio used to measure a company's ability to pay its short-term liabilities using current assets,
Current Ratio can be calculated by the formula:

Current Ratio = Current Assets / Current Debt

b. Quick Ratio

It is a ratio used to measure a company's ability to pay short-term liabilities using more liquid assets. Quick Ratio can be calculated with the formula, namely:

Quick Ratio = Current Assets - Current Inventory / Debit

c. Cash Ratio (Slow Ratio)

This is a ratio used to measure a company's ability to pay short-term liabilities with cash available and held in the Bank. Cash Ratio can be calculated by the formula, namely:

Cash Ratio = Cash + BANK / Current Debt

2. Solvency Ratio

This ratio is also called the leverage ratio, which measures the ratio of funds provided by the owner to the funds borrowed from the company's creditors.

This ratio is intended to measure to what extent the company's assets are financed by debt. This ratio shows an indication of the level of security of the lenders (banks).

The Ratios incorporated in the Leverage Ratio are:

a. Total Debt to Equity Ratio

It is a comparison between debts and equity in corporate funding and shows the ability of own capital, the company to fulfill all its obligations.

This ratio can be calculated using the formula, namely:

Total Debt to Equity Ratio = Total Debt / Shareholders' Equity

b. Total Debt to Total Asset Ratio (Ratio of Debt to Total Assets)

This ratio is the ratio between current debt and long-term debt and the total assets known. This ratio shows how much of the total assets spent on debt. This ratio can be calculated by the formula:

Total Debt to Total Asset Ratio = Total Debt / Total Assets

3. Profitability Ratio

This ratio is also referred to as the Profitability Ratio, which is the ratio used to measure a company's ability to earn profits or profits, the profitability of a company embodies the ratio between earnings and assets or capital that generates these profits.

Included in this ratio are:

a. Gross Profit Margin (Gross Profit Margin)

Is a comparison between net sales minus Cost of Goods sold with sales level, this ratio illustrates the gross profit that can be achieved from the number of sales.
This ratio can be calculated by the formula:

Gross Profit Margin = Gross Profit / Net Sales

b. Net Profit Margin (Net Profit Margin)

This is the ratio used to measure net income after tax and then compared to sales volume.
This ratio can be calculated using the formula, which is:

Net Profit Margin = Profit After Tax / Net Sales

c. Earning Power of Total investment

This is the ratio used to measure the ability of capital invested in total assets to generate net profits. This ratio can be calculated by the formula:

Earning Power of Total investment = Profit Before Tax / Total assets

d. Return on Equity

It is a ratio used to measure the ability of own capital to generate profits for all shareholders, both ordinary shares and preferred shares. This ratio can be calculated by the formula:

Return on Equity = Profit After Tax / Shareholders' Equity

Now that's information about the Types of Ratios in analyzing a company's financial statements. Although ratio analysis can provide the useful information you should be careful in analyzing a financial statement.

What you have to remember is that the purpose of financial statement analysis is to use past company performance to predict how it will be in the future. Hopefully, the information that I have provided is useful for you.

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