Financial Ratio Analysis

Financial Ratio Analysis – This method can be used as an analysis of financial statements, i.e. it can analyze ratios. In general, calculations in quantitative data on the balance sheet or income statement.


Do you often hear the term ratio to finance? The discussion this time, will explain financial ratio analysis. Come on .. See the next explanation as follows.


Table of contents :

What is a Financial Ratio?

Types of Financial Ratios

Purpose of Financial Ratio Analysis

Limitations of Financial Ratio Analysis

Advantages of Financial Ratio Analysis

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What is a Financial Ratio?

Financial Ratio is an indicator that can be used to analyze the causes of problems in detail.


Financial measures are very useful for analyzing the mathematical relationship between different amounts in terms of levels, percentages (%), or a very simple proportion. Opportunity analysis is a method for interpreting and calculating financial measures as assessing business performance and status.



Therefore, the analysis must be able to adjust the factors that exist during that time or period with future factors that may affect a position in the financial position or the results of operations of the entity.


At least three degrees must be used for financial analysis, including:


Income statement.

Cash flow statement.

Balance sheet.


Types of Financial Ratios

The following is a description of the types of financial measures according to Rahardjo (2007: 104) which can break down the company’s finances into five groups, namely:


The Probability or Profitability Ratio can show that a certain amount of profit is compared to the asset or seller.

Laverage ratio or Solvency is an ability or capacity of a business as a meet for long-term liabilities and short-term.

Activity Ratio or Activity Ratios is an action that can show a degree of effectiveness when using activities or assets.

The liquidity ratio or Liquidity Rratios is an action that can show a company’s ability to fulfill its obligations in the short term.

Investment ratio or Investment Ratios is an action that can show investment action by means of securities such as stocks and commitments.

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Purpose of Financial Ratio Analysis

The objectives of the financial measures are as follows:


Management effectiveness in obtaining operating profit from company assets.

Return of common shareholder.

Total liquidity of the company.

There are funds as a company.

Each party has different objectives in considering ratio analysis. Of course, for creditors especially banks that provide a loan in the short term, attention is focused on their liquidity position. This is due to the extent to which the company fulfills its short-term obligations, which are due immediately.


Limitations of Financial Ratio Analysis

In this technique, it has several limitations that must be realized during its use so that it is not mistaken for its use, namely:


The restrictions that are included in the books or in the annual accounts are also limited to these techniques.

The two companies being compared may not have the same accounting policies and standards. Therefore, comparisons can be made to cause errors.

Materials for calculating steps or financial statements that contain many estimates and assessments that can be assessed or are subjective in nature.

If there is no available data to calculate the ratio, it is difficult to calculate the ratio.

The difficulty in choosing the right ratio that can be used for the benefit of the wearer.

The values ​​included in the financial statements and quotas are cost (costs) and not market prices.

Classifications in financial statements can affect metrics.

The accounting methods presented in the accounting standards can be applied differently by different companies.

Difficult if the data that has been available out of sync.

Advantages of Financial Ratio Analysis

Ratio analysis has an advantage that can be compared to other analytical techniques. There are advantages that are as follows:


It is a substitute for a simpler one and the information that can be contained in a financial report is very complex and detailed.

Can find out a company’s position in the middle in another industry.

It’s easier to find company trends and make predictions for the future.

Standardization in the size of a company.

It is easier to compare a company with another company or track the company’s progress periodically or “Time Series” .

A ratio is a summary statistic or number that is easier to interpret and read.

Very useful for complementing predictive models and decision models.

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In this analysis, it can be used to carry out an analysis of financial statements, calculation of data in quantitative balance statements or profit and loss reports.

by Abdullah Sam
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