Piya Angelina Cruz-Tan, MBA
Cybernate Systems Intelligence Technology Corporation, Philippines
(Abstract of lecture delivered at the 68th Annual Philippine Society of Pathologists Convention in April 2019, Conrad Manila Hotel)
No one should be intimidated whenever financial ratios and financial analysis are being talked about. In fact, we should embrace to understand all of them and learn their inter-relations with one another.
Let us have a bit of an analogy. When accountants compute for the ratios from the financial reports, they deal with percentages and ratios similar to a pathology department generating its report on Hematology , Blood chemistry, etc. Both deal with percentages and ratios and both are subject to interpretation by the entrepreneur (financial ratios) and pathological reports by doctors.
What everyone does not realize is that in both cases all results are “symptomatic”. If there is something wrong with the business, it will reflect in the profitability, liquidity, solvency, activity, debt and performance ratios. The business ratios will not be within an acceptable range. On the flip side, if all is well, the business ratios will be a building block for business expansion.
Meantime, let us be academic. Please remember that the sources of data of the financial ratios need to be correct. Otherwise, all indicators will be result to wrong interpretations. Please find the sources below:
· Balance Sheet or Statement of Financial Position
· Income Statement or Statement of Income or Comprehensive Income
· Cash Flow Statement or Statement of Cash Flow
· Statement of Changes in Equity
Personally, my favourite ratios are liquidity and profitability ratios because both ratios will give the information whether I have enough cash to fund my operations and pay my debt. On the other hand, profitability ratios will tell if the margins are enough to sustain the operations. Debt ratios are a red flag for me. I try to keep this as low as possible. My second favourite is activity ratios because it will give you indicators whether you are on the right business track.
After all the ratios and percentages, we must not forget that business is still instinctive. We must tap from that feeling and use the ratios simultaneously in order to build a health business enterprise.