What is Financial Ratio Analysis?
Financial ratio analysis is a technique used to evaluate a company’s performance and financial health by computing and interpreting ratios from its financial statements. Ratios are grouped into liquidity, leverage, efficiency, profitability, and market value categories, each answering a specific business question.
How It Works
- Identify the analytical question (liquidity, leverage, profitability, efficiency, market value).
- Select the relevant ratios (current ratio, debt-to-equity, asset turnover, ROE, P/E).
- Compute the ratios using audited figures.
- Benchmark against the company’s history, peers, and industry norms; investigate outliers.
Saudi Context
Saudi analysts, lenders, and investors use ratio analysis to evaluate Tadawul-listed companies and family-owned SMEs alike. SAMA-supervised banks rely heavily on liquidity and leverage ratios for credit decisions, and ZATCA may reference profitability ratios when reviewing transfer pricing documentation.
Example
A Saudi retailer reports a current ratio of 1.5, debt-to-equity of 0.8, ROE of 18%, and asset turnover of 2.2. Compared to a sector average ROE of 12%, the company is performing well above peers.