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Financial ratios allow a business to assess many aspects of the performance, being an integral part of financial statements analysis. The ratio compares companies, industries, different periods of activity of the same company, and the results of the organization with the average industry ones. In financial statement analysis, the following groups of financial ratios are recognized as the most important: liquidity, activity, profitability, capital budgeting and market ratios (Raiyani and Bhatasna, 2011). In my opinion, activity ratios are the most important ones.
Activity ratios help to analyze how efficiently the company uses its funds. Turnover indicators are of great importance for assessing the financial position of a company since the rate directly impacts the company’s solvency (Yanti and Purba, 2020). In addition, an increase in the rate of turnover of funds, while other indicators are equal, reflects an improvement in the production and technical potential of the firm (Yanti and Purba, 2020). For instance, the commonly used activity ratios are asset turnover and receivables turnover. The first characterizes the efficiency of the firm’s use of all available resources (Yanti and Purba, 2020). The receivables turnover ratio shows how many times, on average, receivables have turned into cash during the reporting period.
Reference List
Raiyani, J. R. and Bhatasna, R. B. (2011) Financial Ratios and Financial Statement Analysis. Portland: New Century Publications.
Yanti, P. and Purba, N. M. (2020) ‘Effect of activity ratio, productivity and profitability on liquidity in manufacturing companies on Indonesia stock exchange’, International Journal of Management and Business (IJMB), 1(2), pp. 98-103.
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