Financial Ratios

Financial Ratios

Financial Ratios indicate about the financial position of the company. Accompany is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its oblivions, both short – term as well as longterm, without strain. It is a sound principle of finance that the short-term requirements of funds should be met out of short term funds and long-term  requirements should be met out of long-term funds. For example if the payment for raw materials purchases are made through the issue debentures it will create a permanent interest burden on the enterprise. Similarly, if fixed assets are purchased out of funds provide by bank overdraft, the firm will come to grief because such assets cannot be sold away when payment will be demanded by the bank.

Financial ratios can be divided into two broad categories:

(1) Liquidity Ratios &   (2) Stability Ratios