Question

Describe the differences and similarities between Financial position ratios and Financial performance ratios.

Answer 1

Differences and similarities between financial position ratios and financial performance ratios

FINANCIAL POSITION RATIOS

The term financial position ratios refers to the ratios which reflect the true financial position of the company. The financial position ratios which is normally used for analyzing the financial position of the company is are given below:

1- Inventory Turnover ratio

The term inventory turnover ratio indicates the velocity with which stock finished goods is sold i.e, replaced. Generally it is expressed as number of times the average stock has been "turned over" or rotate of during the year.

Formula:

Cost of goods sold/Avg stock of finished goods

High turnover suggests efficient inventory control, sound sales policies, trading in quality goods, reputation in the market, better competitive capacity and so on.

Low turnover suggests the possibility of stock comprising of obsolete items, slow moving products, poor selling policy, over investment in stock etc.

Thus as above financial position ratio of inventory turnover ratio explains the financial position of high and low in the market just like some other financial ratio which the financial position of the company are given below

2- Raw material turnover ratio

3- Work in progress turnover ratio

4- Debtors turnover ratio

5- Creditors turnover ratio

6- Working capital ratio

7- Fixed assets turnover ratio

8- Capital turnover ratio

FINANCIAL PERFORMANCE RATIOS

The term financial performance ratio refers to the ratio which explains the performance of the company. The main performance measuring ratio of the company are given below

1- Return on Investment

Return on investment is a ratio between the net profit and cost of investment resulting from an investment of some resources. A high ROI means the investment's gains favorably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investment. It is a performance measure used by businesses to identify the efficiency of an investment or number of different investments.

Formula

Earning before interest and taxes/ Equity + debts

Thus from above financial performance ratio of return on investment shows the performance of the company as to return on investment of how much we gain from investing money in the company. Just like above there are other performance measures which normally used by the company's for evaluating their performance are given below.,

2- Return on Equity

3- Return on Assets

4- Earning per share

5- Dividend per share

6- Price earning ratio

7- Dividend Yield

8- Book value per share

9- Market value to book value