What Are The Best Financial Ratios To Use?

Singapore is always full of investing opportunities and the advice out there is that the potential investors should always take their time and deeply analyze the market situation. This will ensure that an investor gets to perfectly fit a given opportunity and also be prepared to encounter certain financial shortfalls that might be prevailing within the given business environment. Highly successful investors do make it a habit to know the true status of the companies which they would like to throw in their assets as well as cash by having some kind of comparison on the businesses available. When thinking about investing there will always be a ton of questions to answer so as to be assured of the right investing path. Perhaps this is one way through which a business can get to be on the right track.

One business tool that can accurately provide solutions to all these problems is the financial ratio analysis. The ratios are usually many and as a result an investor is likely to get confused with their number and probably which one will best work out in a given business situation. The key to getting over this kind of situation is to thoroughly analyze all the ratios provided so as to have that clear choice as to which ratio is likely to take your business model to the next level. Perhaps we are talking about a strange business term and it would be nice if we set the record straight and briefly explain the meaning of financial ratio analysis.

Financial ratio means combining numbers taken from the balancing sheets and other financial statements in different ways. These numbers are modelled to indicate efficiency, profitability and solvency level of a business which may be of interest to an investor. The aspects described in the financial ratio analysis do give somehow an accurate picture of how we expect the business to operate. For instance the solvency ratio does depict how a business is better placed in meeting its financial obligations in a timely manner so as to adversely impact anything or process which may be fully reliant on the business.

Efficiency on the other hand deals with how positively a business can deal with the outcomes touching on sales and profits.
There are always some aspects that be known whenever financial ratio analysis is involved. The cost of goods is one such important aspect and this does provide a direct measure of the kind of direct purchase a company should be making for a given specific job. These in most instances do include costs for labor, equipment, material, contractors as well as any other expenses. The current assets as well as liabilities should be determined so as to get that accurate picture of the environment through which a business may be operating in. Administrative expenses, unpaid invoices as well as the working capital should all be included and the benefit of this is that it is possible to take into account all the variants that do play an important role in determining business success.

The most common financial ratio tools that can be employed in financial analysis based on profitability ratios are usually net profit margin and net profit to total assets. The net profit margin describes the return on sales amount. This is usually the profit that the business does get before paying any taxes it may be obligated to. A higher value of net profit margin is an indication that the given business in question is highly profitable thus favourable for investment moves. This aspect can be used as a tool for coming up with that price which will be used to beat the competition and finally gain market dominance. This ration can be calculated by dividing the profit before taxes with the net sales.

The other important financial ratio analysis tool is the net profit to total assets as is usually based on the assets which a business does own. It shows the kind of profit value a business is making and this ratio is calculated by taking into account the profit value that is made after paying the given tax obligations. A higher percentage do indicates that a business is indeed on the right financial path. This ratio is calculated by taking the net profits after tax obligations then dividing this value with that of the total assets. In Singapore net profit to total assets is between 6-8% on the average and a value of 15% is one sure indication that a business is having the intended financial success.

With regard to solvency ratios, some of the financial ratio analysis tools available are the current ratios, quick ratio, and working capital to assets, liabilities to total assets and cash to current liabilities. The current ratio does indicate the current assets that a business has in possession to meet its current liabilities. A value of 2 does indicate a healthy business which is able to live up to its expectations. The quick ratio does take into account the liquidity of the current assets owned by a business and also does measure the relative ease with which the given current assets can be converted into liquid cash so as to cover up business’s current liabilities. This tool is preferred by many lenders as it gives a good picture of solvency level of a business. A value of 1.35 is considered good for businesses operating within Singapore.

Efficiency ratio does explain how easy it may be for the business to collect any amount it intends to receive. High successful businesses within Singapore have the standard collection time of 10 to 15 days on the average. This ratio is calculated by dividing the receivable accounts with sales and then multiplying the resulting value with 365. A ratio below 40 implies that a business is highly efficient and investors should go for such kind of businesses. The good thing about these ratios is that they help investors to get the idea of a business very well and provided that the tools are employed effectively the outcome is that it becomes very easy to make a decision into investing in a given company or not.