
What Is Financial Ratio Analysis? 
It’s not an easy task to invest in any of the companies in
Singapore. You should know about the status of the company
that you are investing in comparison to other businesses.
You are loaded with questions when you think of investing.
Financial ratio analysis is the answer to all the questions
that you have in your mind. Initially you get confused with
a number of financial ratios. The key is to take the right
ratios provided that you have knowledge about those.
What are financial ratios?
Financial ratios are nothing but the process of combining
two or more numbers in different ways. The numbers are
generally taken from the balance sheet or the financial
statement. Financial ratios indicate the profitability,
efficiency and solvency of a business. While the
profitability ratio conveys the ease with which the business
is going to make profit, the solvency ratio depicts the way
the business is going to meet its financial obligation in
time bound manner. The efficiency ratio determines the way
the business is going to show positive outcomes with sales
and profits.
Some of the basic terms that you should know while doing
financial ratio analysis
1. Cost of the goods sold
This is a measure of the direct purchases made by a company
for doing specific jobs. This can include the cost of
labour, material, subcontractors, equipment and any other
expenses.
2. Overhead
This is also a kind of expense which doesn’t include any
depreciation of value. This type of expense includes all
sorts of administrative expenses.
3. Unpaid invoices
This is the amount of money that your customers owe you as
you have provided services to them.
4. Unpaid bills
This is the amount of money that you need to pay your
vendors for the equipments that they have provided you to
manufacture your goods.
5. Current assets
These are assets which can be converted in to money in one
year. These assets include amount of cash, prior expenses,
the amount you are going to receive, inventory and other
assets which can be easily converted in to money.
6. Current liabilities
These are the debts which you should pay within one year.
Taxes, amount of money payable, debts for a short term,
notes, withholdings and other liabilities come in this
category.
7. Working capital
When you subtract the current liabilities from current
assets you get the value of working capital.
Some of the financial ratios that help you in financial
analysis
Two profitability ratios
1. Net profit margin
This is the amount of return on sales. This is the profit
which you get before paying taxes. The higher amount of net
profit margin is healthy for businesses. This helps you
stand out in the cutthroat market which low prices
competitors dominate. You can calculate the ratio by
dividing the net profit before taxed with net sales. You can
convert in to percentage by multiplying 100 with it. While
industry average in Singapore stands 4 percent, you can
increase this ratio to 10 percent for maintaining a healthy
profile.
2. Net profit to total assets
This is a ratio of return on assets. This is the most
important ratio that shows how much profit a company is
making. This ratio is calculated by knowing the value of
profit after paying taxes. The higher is the percentage, the
higher is the profit percentage of the company. You can
calculate the ratio by dividing the net profit after taxes
with total assets value. You will get the value in
percentage by multiplying the number with 100. The industry
average in Singapore is between 6 and 8 percent. When you
reach 15 percent, the ratio indicates that you have a well
run company.
Solvency ratios
1. Current ratio
This ratio is indicative of the value of the current assets
to meet the current liabilities. When you have this ratio
value as 2 your company is termed as a healthy company. This
ratio varies from standard of company to company. A sloe
selling company needs high current ratio. You can calculate
this ratio by dividing the current assets by current
liabilities.
2. Quick ratio
This ratio depends upon the liquidity of your current
assets. This ratio also measures the ease with which your
current assets can be converted in to cash to cover up the
current liabilities. This is a hot favourite ratio of the
lenders. You can calculate this ratio by dividing the cash
plus current receivables with the current liabilities. A
number more than 1.35 is a good indicator.
3. Total liabilities to total assets
The value of this ratio above 1.25 indicates that your
company is able to absorb the operating losses to meet the
financial obligations. You can divide total liabilities by
total assets to find this number.
4. Working capital to total assets
As the name of the ratio suggests, this ratio indicates the
percentage of the assets in the form of working capital. To
easily meet the liabilities, you can convert the working
capital in to cash. You can find the ratio by dividing the
current assets with working capital. A value of 0.25 or
greater is good for a business.
5. Cash to current liabilities
This ratio is also known as doomsday ratio. When you have to
meet the current financial obligations, your business should
be prepared for this. This ratio can be found out by
dividing the cash by current liabilities. This is the most
crucial solvency ratios of all. When this value is equal to
1, your business is said to have good doomsday ratio.
Efficiency ratio
This ratio is a measure of how easily you can collect the
amount receivable by your business. The standard time period
is 10 or 15 days in Singapore. This ratio can be calculated
by dividing the average accounts receivable with sales. Then
you need to multiply 365 with the outcomes. When this ratio
goes below 40, the efficiency ratio of a company becomes
better.
Sales to total labour ratio
This ratio is indicative of the expenses on the labour from
the amount of profit that you earn. You can get this number
by dividing labour cost plus labour expenses with sales. You
can convert the number in to percentage by multiplying 100
with it. A percentage below 30 is a good indicator for a
company.
Conclusion
When you analyse these ratios, you get an overall idea of a
business. You can easily decide whether to invest in a
company or not. 





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