The simple ratios method is one of the procedures of vertical financial analysis along with the analysis of integral percent and standard ratios.
Financial ratio
Reason is the method that consists of establishing relationships of the games and groups of games with each other through the results of various mathematical calculations. (WA Paton. Accountant's Manual. Grupo Noriega Editores, 1992)
The simple ratios method
According to Valbuena (p.139):
It is the method that consists of establishing the relationships of the games and groups of games with each other, through the results of various mathematical calculations. The fundamental object of the analysis by means of reasons is based on the relationships that exist between the various elements that appear in the states, they are the most important factors and not their absolute values.
Financial ratios establish a numerical relationship between two quantities, which generally indicates how many times the first to the second contains.
They are used to make financial statements more understandable, since they measure the variations in their numerical data, in this case they are used as percentage data that will measure the relationship between them, and that facilitate their comparison with the data obtained in years previous within the same economic unit or with those obtained by similar ones in the same period.
The use of ratios or indices helps us to interpret the information that appears on the balance sheet and in the income statement; These indices allow us to quickly evaluate the position of a company by observing the relationship between the most important lines of its financial statements, as well as by comparing the results of the economic unit with those obtained by other competitors.
The average financial indexes for an industry should be used as indicators only, and not as goals to be achieved, since the approach of the goals to be achieved by a company must be programmed according to the results of its own financial analysis.
The selection of the reasons to use in each analysis depends on what you want to know and the business of the company, the analysis by means of reasons will indicate trends and weak points in the company as long as a suitable selection has been made of the reasons used. The reasons to be used in the analysis of financial statements are classified as static, dynamic and mixed.
For Baena (p.122) the simple ratios procedure has great practical value, since it allows obtaining an unlimited number of ratios or indicators that serve to determine liquidity, indebtedness, activity or profitability, in addition to the permanence of its inventories in storage, customer collection and supplier payment periods, and other factors that serve to broadly analyze the economic and financial situation of a company.
Classification of simple reasons
- Static reasons. They are those that express the relationship between items or group of items in the statement of financial position. Dynamic reasons. They are those that express the relationship between the items or group of items in the income statement. Mixed reasons. They are those that express the relationship that exists between items or group of items in the statement of financial position with items in the statement of income.
Some commonly used financial reasons
Within the solvency and activity analysis
- Liquidity ratio or solvency ratio or working capital ratio Immediate solvency ratio or acid test Loan turnover ratio Defensive position index Safety margin index Inventory turnover ratio Average collection period Fixed asset turnover Total asset turnover.
In the stability and indebtedness analysis
- Indebtedness ratio Liability / Equity ratio Index of the number of times interest has been earned Reason for fixed payment coverage External financing ratio or level of indebtedness Profit to interest ratio or interest coverage ratio Index of capitalization or long-term Average Portfolio Days Fixed asset turnover Capital investment index Capital book value index
In the Profitability analysis:
- Return on equity index Return on assets or return on total investments Index Gross Profit Margin Index Operating Profit Margin Index Net Profit Margin Index Return on Total Assets (RAT) Returns Capital (CR). Sales study indices. Earnings per share (EPS). Price / earnings ratio (P / E). Net profit study index.
Bibliography
- Baena Toro, Diego. Financial analysis: Financial projections approach. ECOE EDICIONES, 2010.Valbuena Álvarez, Rubén. The evaluation of the project in the decision of the employer. UNAM, 2000.
