The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios. Ratio Analysis as a tool possesses several important what is profitability ratio. The data, which are provided by financial statements, are readily available.
The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm’s financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the distortions which arise in financial statements due to such things as Historical Cost Accounting and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm’s performance and to identify areas which need to be investigated further. The pages below present the most widely used ratios in each of the categories given above. Please keep in mind that there is not universal agreement as to how many of these ratios should be calculated.
You may find that different books use slightly different formulas for the computation of many ratios. Jump to navigation Jump to search A loss ratio is a ratio of losses to gains, used normally in a financial context. Such companies are collecting premiums more than the amount paid in claims. Conversely, insurers that consistently experience high loss ratios may be in bad financial health. The terms “permissible”, “target”, “balance point”, or “expected” loss ratio are used interchangeably to refer to the loss ratio necessary to fulfill the insurer’s profitability goal. This ratio is 1 minus the expense ratio, where the expenses consist of general and administrative expenses, commissions and advertising expenses, profit and contingencies, and various other expenses. For banking, a loss ratio is the total amount of unrecoverable debt when compared to total outstanding debt.
These calculations are applied class-wide and used to determine financing fees for loans. Harvey Rubin, Dictionary of Insurance Terms, 4th Ed. Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance, p. Robinson, “Use And Abuse Of The Medical Loss Ratio To Measure Health Plan Performance”, Health Affairs, vol 16, No. Franken warns against weakening law on health-care spending”. Financial ratios are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided by the financial statements.