Whiz Consulting is a well-known accounting and bookkeeping company operating in the United States. In their recent interview, they highlighted the significance of ratio analysis. One of their accountants quoted, "When we complete the preparation of the financial statements for our clients, the primary interpretation is via ratio analysis. It would be best if you had it to know how you've performed and where you stand economically. It is like the first bite when you're hungry, a little satisfying but leaves you wanting more. In simple words, it offers an 'at a glance' view of your financial performance and position." 



Ratio analysis involves using various elements of financial statements to derive meaningful insights. It can be only a balance sheet, profit and loss, cash flow, or items from all the sources. It delves deep into the realm of:

Profitability- Signaling the company's ability to earn profits-gross profit ratio, gross profit margin, net profit ratio, net profit margins, operating profit, etc.

Liquidity: Defines the company's ability to clear the short-term debt obligations (includes current ratio, quick ratio, acid-test ratio)

Solvency: Company's ability to pay long-term debt obligations (Debt-equity ratio, interest coverage ratio, etc.)

Turnover: Indicates the company's efficiency in turning assets into sales and profits (assets turnover, inventory turnover, etc.)

Market valuation: Determines a company's value in the market and the prospect of attracting or deflecting investors (earning per share, Price-earning ratio, etc.)



Ratio analysis offers better insights when more than one is used. It facilitates comparisons with industry benchmarks, other entities, or the business itself. The different ratios cover various aspects of the financial statements and provide an overall single glance view. It can help detect potential red flags in advance. For example, if the inventory turnover ratio increases way more than the previous year, it may signify working capital blockage. These issues can snowball into a massive problem if not treated early. 



The advisors at Whiz Consulting shared their experience concerning ratio analysis of a client, "Ratio analysis relies on accurate information and financial statements. When we prepared the solvency and turnover ratios for insights into their financial performance, the inventory and cash flow did not match. While the inventory ratio peaked, cash flow was also rising. Accounts receivable did not impact the cash flow during the year, which made our experts skeptical about the correctness of the information. An in-depth study revealed the errors in reconciliation that they missed and could lead to severe problems."



Ratio analysis uses the balance sheet, income statement, or cash flow statement components. Only balance sheet ratios include

Current ratios: Current assets/ Current liabilities

It indicates the company's ability to cover short-term liabilities with available current assets. A 2:1 ratio is acceptable. 



Debt equity ratio: Total debt/ Shareholders' equity

It shows the proportion of debts to equity in the company. Leveraging more debt is acceptable to a certain degree. 



Debt to asset ratio: Total debt/ Total assets

It indicates the portion of assets external debtors possess the claim to in the balance sheet. It should not be too high. 



The list of balance sheet ratios is exhaustive. Similarly, the income statement has the following ratios:



Gross profit ratio: Gross Profit/ Sales *100

It signifies the company's ability to generate gross profits. The higher ratio, the more profits a company earns. 



Net profit ratio: Net profit/ Sales* 100



It indicates its ability to generate profits after paying interest and taxes. 



Some ratios mix the components of both financial statements for a comprehensive view. These include:



Inventory turnover ratio: Cost of goods sold/ Average Inventory



It indicates the efficiency with which a company generates revenue from inventory. 



Fixed asset turnover ratio: Net sales/ Average fixed assets



It signifies the return on investment on assets. 



About Whiz Consulting:



Whiz Consulting is a premium accounting and bookkeeping industry offering services at affordable costs. It caters to firms operating at different scales by assessing their needs thoroughly. They have vast experience and expertise in specialized accounting, bookkeeping, budgeting, forecasting, advisory, etc., for various industries, including legal, real estate, media, e-commerce, etc. 
https://www.whizconsulting.net/us/ratio-analysis-services/