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1. HIGHER POLYTECHNIC INSTITUTE OF TECHNOLOGIES AND SCIENCES
DEPARTMENT OF APPLIED SOCIAL SCIENCES - ACCOUNTING
Name: Arsénio Wesley Paulo Hinda
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FINANCIAL RATIOS AND PERFOMANCE ANALYSIS.
EXPLAIN HOW RATIOS HELP EVALUATE A COMPANY´S.
Course: Accounting
Class: CTB1 / M3
Year: 2025

2. Financial ratios are quantitative
indicators obtained by dividing one
financial statement item (Balance Sheet,
Income Statement, or Cash Flow
Statement) by another. They transform
large volumes of raw data into
meaningful and comparable metrics.
FINANCIAL RATIO ANALYSIS AND
PERFORMANCE EVALUATION
What Are Financial Ratios?
Think of financial statements as the human body and ratios as a
medical check-up. No one can assess a person's health just by looking at
their total weight. You need to check their heart rate (profitability), blood
pressure (liquidity), and muscle strength (operational efficiency).Ratios do
just that for a company.

3. 1.
LIQUIDITY:
FINANCIAL RATIO ANALYSIS AND
PERFORMANCE EVALUATION
HOW RATIOS HELP EVALUATE A COMPANY'S PERFORMANCE
FINANCIAL RATIOS HELP EVALUATE A COMPANY ACROSS FOUR
CRUCIAL DIMENSIONS.
By looking at a ratio over time (trend) and in
comparison to competitors (benchmarking),
stakeholders(managers,investors, creditors) can identify
strengths and weaknesses and make informed decisions.
The Ability to Pay Short-Term Bills Liquidity
measures a company's ability to convert assets into cash to
cover short-term obligations.
Does the company have enough cash to pay its
suppliers and debts due in the next 12 months?
Main Ratio (Example): Current Ratio Current
Ratio = Current Liabilities / Current Assets
A ratio greater than 1 suggests that the company has
more liquid assets than short-term debt, indicating a margin
of safety.

4. How much revenue
translates into profit? How
well is the company using its
shareholders' money?
The Ability to Generate Profit Profitability measures
management's success in transforming sales and resources
into profit. This is the bread and butter of business survival.
Return on Equity (ROE):
ROE = Equity / Net Profit
It is a vital metric for
shareholders. A high ROE
shows that management is
using owner investment
effectively to generate
income.
Main Ratios (Examples):
Net Profit Margin: Measures
the profit generated by each
monetary unit of sale. If a
company has a 10% margin, it
means that 10% of each sale
becomes net profit.
2. PROFITABILITY:

5. 3. SOLVENCY
(OR
LEVERAGE):
Risk and Capital Structure
Solvency measures a company's
ability to meet its long-term
obligations and reveals the balance
between debt and equity financing.
How much debt does the
company carry in relation to its
equity? Is the debt level sustainable?
Main Ratio (Example):
Debt-to-Equity Ratio (D/E) Debt-
to-Equity Ratio = Equity / Total
Debt
A high ratio means the
company is heavily financed by
creditors (banks) rather than
shareholders, which implies greater
financial risk in times of crisis or
rising interest rates.

6. Asset Management Efficiency ratios assess how well and
how quickly the company uses its assets (inventory, accounts
receivable) to generate sales or cash.
Is inventory being sold quickly? Are customers paying
their bills on time?
Main Ratio (Example): Accounts Receivable
Turnover
It indicates how quickly the company is collecting
amounts owed by customers.
A high ratio is generally a good thing, meaning that money
is not "stuck" in unpaid invoices.
4. EFFICIENCY (OR ACTIVITY):

7. Type of Ratio Analysis Focus Main Stakeholder
Liquidity Short-term, payment capacity. Creditors (Banks), Suppliers.
Profitability Profit generation and return on
investment.
Shareholders, Managers.
Solvency Long-term, bankruptcy risk, debt. Creditors, Long-Term Investors.
Efficiency Asset and operations management. Managers (Operational Effectiveness).

8. CONCLUSION
In short, financial ratios act as an early diagnosis system. They allow you to identify trends (is profit increasing or
decreasing over the years?) and compare the company's health with its market peers, transforming static numbers into dynamic
insights for decision-making.