Accounting – Financial Ratios You need to know

Financial Ratios You need to know

When the term financial ratio is quoted, the first thing comes to most people’s mind are formulas and equations that are super hard to understand and got terrified. Nonetheless, this ought to not hold true as some simple financial ratio also helps provide useful information to your organisation despite there are more advance technique for other more complicated matters (Also see How does the Balance Sheet relate to Profit and Loss?). Below are several of the ratio you require to understand.

Return on Capital Employed

This ratio is meant to assist the management to understand exactly how effective the resources are employed in business to produce the profit in the Profit and Loss. It is computed by dividing the company’s net profits (after deducting interest and tax) with the total assets the company owns, which can be seen from the Balance Sheet. If the ROCE is high, it shows that the assets are used in an optimize manner so to produce the highest possible profit.

Price Earnings Ratio (P/E)

The ratio basically means how much do the investors willing to pay for RM1.00 profit made by the company. In other words, it is the price to purchase RM1.00 profit made by the company. This is always used in conjunction with other ratios to form an investment decision.

Earnings Per Share (EPS)

You certainly expect a return in one form or another when you decide to invest in a particular company’s shares. EPS gauges the take-home pay that will certainly be gained by each share on a business’s supply. This can be calculated by dividing the total profit for the year by the total outstanding shares of the company.

Gearing Ratio

The ratio is computed by dividing the long-term liabilities by the total assets (or the total of liabilities and equity). It aims to provide an indication on whether the debt finance of a company is already at a dangerous level. This can be sometimes affected by assets revaluation.

Working Capital ratio

This is one of the ratios to test the liquidity because it aids one recognize as well as evaluate the wellness circumstance of business; just how simple it is to transform the business’s assets right into cash money in order to fulfil short-term financial obligations. The ratio is calculated by dividing the current assets using the current liabilities.

Take Away

These are essential ratios that can be depended on when thinking about when it comes to making an investment. The ratios can be relied upon if you intend to gain useful financial insight on how well the investment does. In most cases, they need to be evaluated after referring to the sector performance. Additionally, you might take into consideration involving an accounting firm in Johor Bahru as well as allow the specialist to help you.

Leave a Reply

Your email address will not be published. Required fields are marked *