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RATIO ANALYSIS

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RATIO ANALYSIS

Ratio analysis deals with the research and quantification of the relationship that exists between the balance sheet positions of a company, with the aim of enabling a credible assessment of the financial position and activities of the company. It is a tool that the analyst uses to get a numerical view of the situation in which the company is, as well as to compare this information with the previous period, another company, industry or the economy as a whole. The amount of one balance sheet item to another, expressed in a simple mathematical formula, is called the ratio. The significance of ratio numbers lies in the fact that absolute numbers usually do not say much about themselves, and that it is difficult or impossible to compare two subjects if there is no mutually comparable size.

There are a number of ratios that can be calculated from balance sheet indicators, and relate to the performance, activity, finances or liquidity of the company. Most often, ratio numbers are divided into several groups according to what balance sheet items they process and what information they provide. Thus, there are liquidity ratios, activities, profitability ratios, market ratios and debt ratios, ie financial structure ratios. The liquidity ratios aim to show the ability of the company to pay due liabilities, while maintaining the required volume and structure of working capital and maintaining good creditworthiness of the company. For the assessment of liquidity, working capital and short-term liabilities (general liquidity ratio) are most often compared, or cash and its substitutes and short-term liabilities (rigorous liquidity ratio).

Ratio activity analysis measures a firm’s ability to convert different balance sheet and income statement items into revenue. It is understood that companies strive to perform this conversion as quickly as possible, as this results in higher turnover and higher turnover. The most commonly used raid activities are the average receivables collection period and the inventory sale period. Profitability ratios are probably the most numerous ratio numbers, as they look at a company’s ability to make a profit, comparing it to the relevant costs incurred over a period of time. The profitability of a company is most often expressed by the ratio of net profit and net sales revenue, which is the profit margin. Also important are the indicators ROA (rate of return on total assets) and ROE (rate of return on own funds),

The ratio between own and borrowed funds of a company represents its financial structure and concerns the liabilities of the balance sheet. The analysis of the appropriate balance sheet positions of liabilities provides ratio indicators of the financial structure, which aim to measure the company’s ability to repay its debts. The most commonly used and probably the most useful is the ratio of those borrowed according to their own resources. When this ratio is high, it generally means that the company is over-indebted, as it has financed a large part of its growth by borrowing, which can cause a drop in profits due to additional interest expenses. Due to the sensitivity and importance of the issue of corporate indebtedness, this ratio is very useful, and since it is easy to calculate, it is very often used in practice.

For investors on the stock exchange, the most important are probably the market ratio numbers, characteristic of joint stock companies, since they put the market and book prices of shares, as well as the income they bring, in different relations. On the website of the Belgrade Stock Exchange, along with data on companies, there are data on EPS and P / E raids, as the most important ratio numbers of this group, so they will be discussed in more detail below.