Financial analysis using financial ratios is considered one of the most important

tools that management relies on in analyzing financial statements, to determine the

soundness of the financial position and profitability of the company. Other
stakeholders also depend on it, especially owners and creditors, when they make
investment decisions.
 Financial ratios are an attempt to find the relationship between two pieces of
information regarding the company’s financial position. Therefore, they provide
stakeholders with a better understanding of the company’s circumstances than if
they relied on analyzing each piece of information separately. Calculating the
financial ratio requires only a specific amount of skill and ability, but analyzing and
interpreting that ratio is considered the criterion that distinguishes a competent
financial analyst from a less competent financial analyst.
 Since the financial analysis using financial ratios focuses on what happened
during the year, while the balance sheet reflects the balances of the items it contains
at a specific moment, which is the moment of its preparation, so it becomes better to
calculate the average balances during the year, by adding the value at the beginning
of the period to the value at the end of the period. Then divide the result by 2. In the
same context, we will use the idea of averages in calculating the average storage
period to clarify the idea, provided that the rest of the ratios and rates are
calculated on the basis of the balance of assets in the budget, in order to facilitate
presentation.
 It is worth noting that there are a large number of financial ratios that are used
for the purposes of financial analysis, but we will limit ourselves to dealing with a
limited number of them, and they will be divided into five groups, namely: liquidity
ratios, activity ratios, debt ratios, profitability ratios, and market ratios.
The liquidity of the firm The liquidity of the asset

The firm has sufficient liquid

funds (cash and semi-cash) at the
The ease and speed of converting
appropriate time to meet its
this asset into ready cash without
obligations on their due date, to
significant losses.
move its operational cycle, and to
confront emergency situations.
The importance of liquidity

Supports the confidence of the company’s lenders in it by building a good

credit reputation.

The company continues to carry out its operational operations on an ongoing

basis.

The company benefits from the cash discount when providing liquidity.
The importance of liquidity

Avoid borrowing and not have to bear high costs as a result of borrowing
money.

Meeting obligations when they come due, and avoiding the risk of falling into
financial insolvency.

Facing emergency circumstances.

 If liquidity is the availability of cash, then the lack of cash or cash equivalents to
meet the facility’s needs is called financial insolvency, which may result in the
facility being unable to meet its financial obligations on their due date.
Technical financial insolvency Real financial insolvency

It arises when the market value of all the

This occurs when the company does not
company’s assets is not enough to meet
have ready and sufficient cash to meet
its financial obligations. Even if the
its needs for a limited period, but it is
company is given sufficient time to sell
then able to meet these needs and fulfill
the assets, it will not be able to pay all of
its obligations.
its financial obligations.
A firm’s ability to satisfy its short-term obligations as they come due.
 Current ratio = current assets ÷ current liabilities
Current ratio = 1,223,000 ÷ 620,000 = 1.97
Every 1$ of current liabilities is covered by 1.97$ of current assets, and compared
to the industry average (1) we find that the firm’s position is good, as every 1$ of
current liabilities is covered by 1$ of current assets according to the other companies’
results that work in the same activity, while the company covers it with 1.97$, which
indicates an increase in the degree of the company’s ability to meet its current
obligations.
 Quick ratio = (current assets – inventory) ÷ current liabilities
Quick ratio = (1,223,000 – 289,000) ÷ 620,000 = 1.51
Every 1$ of current liabilities is covered by 1.51$ of current assets, excluding
inventory, because it is the most difficult item of current assets to convert into cash
easily and quickly. Compared to the industry average (0.8), we find that the company’s
position is good, as every 1$ of current liabilities is covered by 0.8$ of current assets
excluding inventory, as is evident in the industry average, while 1.51$ are covered by
the company, which also indicates an increase in the degree of the company's ability
to meet its current obligations.
 Cash ratio = cash assets ÷ current liabilities
Cash assets = cash + Marketable securities
Cash assets = 363,000 + 68,000 = 431,000$
Cash ratio = 431,000 ÷ 620,000 = 0.7
Every 1$ of current liabilities is covered by 0.7$ of cash assets, compared to the
industry average (0.5), we find that the company’s position is good, as every 1$ of
current liabilities is covered by 0.5$ of cash assets, as is evident in the industry
average, while 0.7$ are covered by the company, which also indicates an increase in
the degree of the company's ability to meet its current obligations.