To be a good financial director, it is important to keep in mind that when carrying out a ratio analysis Other factors must be analyzed, since the result of certain ratios alone can mislead us in our analyses, and it is essential to take into account the type of business, seasonality and the sector in which the company remains.
The 7 basic ratios that financial management must manage
The financial or accounting ratios They are the coefficients that provide financial units of measurement and comparison. Through them, the relationship between two financial data is established and it is possible to analyze the state of an organization based on its optimal levels. The basic ratios that financial management must consider can be divided between economic and financial. The most significant are:
1. Working capital. It measures the part of capital whose degree of demand is low that is used to finance elements of fixed assets with a high degree of liquidity. The ratio used is:
FM=Current assets / Current liabilities
Your result should be greater than one since there is a part of the current asset (such as the safety stock or the minimum necessary available balance) that, due to its importance in the production process, must be financed with permanent capital. In any case, its analysis alone can be misleading since there may be solvent companies with a ratio less than one.
2. Treasury ratio or immediate liquidity coefficient (RT). Measures the possibilities of meeting short-term payment obligations. Its optimal value is between 0.1 and 0.3. Above 0.3, excess liquidity may occur in the company, which affects its profitability.
RT= Available assets (treasury and temporary financial investments) + Realizable / Current liabilities
It is a very short-term financial situation ratio, by including among the active elements only those that are already available or that only require the last phase of the exploitation cycle (collection) to be transformed into cash.
3. Financial autonomy ratio (RAF). It relates net own resources to total debts, and reports on the structural composition of financing sources. The ratio measures financial autonomy or independence and attempts to determine the optimal level of debt for a company.
RAF = Net own resources / External resourcesyes
4. Average collection period. It measures the number of days it takes to collect from customers, and is defined by the relationship between the accounts pending collection at the end of a certain period and the daily sales of said period. A very high collection period implies a volume of immobilized resources that must be financed.
Average collection period = Debtors (with VAT) / Sales x 365 days
If the sector in which the ratio is applied is very seasonal, it should be calculated by periods, in order to obtain information that is as objective as possible. The higher the value of this ratio, it will mean that the company has a greater volume of unavailable resources, possibly having to resort to external financing.
5. Average payment period. It measures the number of days it takes to pay suppliers, and is consequently the relationship between the average balance of accounts payable and daily purchases. The average payment period takes on special importance in the relationships of companies with the Public Administrations, in such a way that to avoid late payment the Council of Ministers established on July 25 a methodology for calculating the average payment period to suppliers of the Administrations. Public.
Average payment period = Commercial creditors (with VAT) / Purchases x 365 days
The higher the value of this ratio, the longer the payment to suppliers takes, which reveals that the company is financing itself thanks to them.
6. Economic profitability. It measures the asset's ability to generate profit, regardless of the composition of the company's financial structure. It can also be defined as the profitability of the assets, or the benefit that they have generated for each euro invested in the company.
RAI = Earnings Before Interest and Taxes / Total Assets
7. Financial profitability. Measures the company's ability to remunerate its shareholders. It represents the opportunity cost of funds kept in the company, compared to the cost of money or alternative investments. Relates the economic benefit to the resources necessary to obtain that profit.
ROE = Net profit after taxes / Equity
- All these ratios, basic for financial control and different types of analysis of the financial/economic management of a company, are seen and worked on in detail within the Administrative, Financial and Accounting Management program.
Fountain: SAGE
