Ratio measures the difference and relationship between values in other to make viable decision. They are very significant for measuring client’s performance over a period of time and is generated by dividing the numerator by a denominator with the result being express as a percentage, a monitory value, days or numbers.
Why do we need ratio analysis?
- It helps us make viable decisions on loan approvals
- It helps us understand the type of risk involved in the client business
- It interpret clients business performance better
- It proffers how best to mitigate risk that may arise during course of business
- It clarifies the relationship between previous reports
How to generate ratios
In other to adequately access a business so as to determine the clients net worth and take decision on loan granting, microfinance analyst or account officers are expected to understand the listed ratios below;
- Liquidity Ratio
- Turnover Ratio
- Debt Ratio
- Profitability Ratio
- Repayment Capacity Ratio
While understanding the above ratios, it is important the results generated from the ratios are as a result of the use of one or combinations of financial statements which are key elements in determining these results. Determining a client net worth and performance would require use of the client’s statement of financial position (balance sheet) and the income statement (profit and loss).