The usefulness of ratios in assessing the financial health of a company
Financial ratios, derived from the income statement and balance sheet, facilitate the comparison of different companies in the same industry . They are used to identify the strengths and weaknesses of an organization relative to its competitors.
Financial ratios also help detect financial trends , developments and changes in a role and impact of technology in tourism and hospitality company’s performance. This is therefore a real lever for anticipating potential problems.
Finally, they help investors, creditors and managers make informed decisions and reduce uncertainty . Indeed, financial ratios can measure a company’s profitability, liquidity and solvency and, consequently, the relevance of the company’s overall strategy.
The different financial ratios to measure a company’s performance
Profitability and profitability ratios
Profitability ratios measure a company’s ability to generate profits relative to its sales, assets, or equity. Some of the most commonly used ratios include:
- Net profit margin , which measures the overall profitability of the company.
- Return on equity, which indicates the wealth generated for the company’s owners.
- Return on assets, which provides information on how efficiently the company’s assets are used to generate profits.
Liquidity ratios
Liquidity ratios assess a company’s ability to meet its short-term financial obligations . In other words, they europe email measure a company’s ability to meet its debts payable in the coming months.
Solvency (and debt) ratios
Debt ratios assess a company’s ability to repay all debts .
- The total debt ratio measures the proportion of debts to the company’s total assets.
- The long-term debt ratio indicates the share of long-term debt in the company’s overall financing.