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The_Key_Financial_Ratios - The Key Financial Ratios 1 The...

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The Key Financial Ratios 1 The Key Financial Ratios What is Financial Stability? There is no definite definition to the phrase, “financial stability”. It is really very difficult to meet a consensus on how to define it but everyone agrees on its importance. Probably the reason behind it is the fact that it isn’t forthright, there’s no single tool to measure financial stability. In his speech during an international conference on financial system stability, Sir Andrew Large, the Deputy Governor of the Bank of England says, "It is clear that rapid growth in size, complexity, and diversity of global financial markets has added new dimensions and challenges to the process of maintaining financial stability. “ Besides, industry differs from one another in terms of financial structures. And there are external factors that could influence financial structures such as market, inflation, interest rates, tax rates, economic policies or geographic location. Companies also differ in terms of organizational framework, accounting system, product diversity, size and a lot more considerations. The rapid growth and expansion of the financial market for the past years has brought several disturbances and complexities. Example, the sharp price movements in U.S. Equity markets in 1987 ("black Monday') and 1997; bond market turbulence in the G-10 countries in 1994 and in the United States in 1996; currency crises in Mexico (1994-95), Asia (1997), and Russai (1998); the collapse of the hedge fund Long-Term Capital management in 1998;. ... ( Schinasi) Financial Stability is also evolving, it cannot be seen at only one point in time but there is a need to look back on history to see how they have evolved with time. Comparisons are often made period to period to see the change and understand what makes the variance -- comparison
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The Key Financial Ratios 2 on company’s performance, comparison against their competition or to the whole industry as may be required. How to measure financial stability? “There’s no one tool that can measure financial stability, there’s a handful of them that can aggregately measures the soundness of the business in terms of profitability performance, how well the business has maximize the use of their assets and how well they have managed risk”. These measures are what we called “financial ratios”. A mere glance on a company’s balance sheet won’t tell us anything substantial whether or not the company has a robust financial structure. Same holds true with income statement and the other financial statements. They all become meaningful once we venture out in analyzing and interpreting the data otherwise, it is like gazing on a bunch of trivial numbers. If you compare the financial statements to a façade of a building, you won’t be able to tell the building strength, even how attractive the façade could be, we need to look beyond it further for us to understand the quality of the materials, the mixture, the curing process, the quality of work, so on and so
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The_Key_Financial_Ratios - The Key Financial Ratios 1 The...

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