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- Title
Financial ratios in the function of business risk assessment.
- Authors
Lucic, Ljiljana
- Abstract
The paper discusses the need and the practical importance of the development of the business analysis theory on the basis of financial indicators - financial ratios. The common practice today is to calculate financial indicators on the basis of the positions from the financial statements, and, based on that, to analyze different aspects of the financial state: liquidity, solvency, coverage, efficiency, leverage. The financial indicators are used by companies for internal analytical needs, but also by agencies for rating estimation, by bankers for the credit-worthiness of potential loans, by analysts on the securities market for risk estimation. However, the financial indicators are not standardized - the problem highlighted by J.O.Horiggan in the Sixties. The consequence is that various authors and institutions form the list of indicators as they choose. It should be stressed that certain indicators which are calculated and published by a number of companies are not calculated in accordance with methods of the International accounting standards board (IASB). The second issue is that the value calculated as an average for a whole sector is used as the only benchmark in the analysis. However, neglecting of the organizations' structure whose benchmarks are calculated, may result in inaccurate estimation of business success i.e. business risk. The paper concludes that, for an efficient use of financial indicators in financial standing estimation, it is necessary to develop a theory of financial ratios analysis. Furthermore, median and quartile values should be used instead of average values for calculation of benchmarks.
- Subjects
FINANCIAL risk; RATIO analysis; ECONOMIC indicators
- Publication
Online Journal of Applied Knowledge Management, 2014, Vol 2, Issue 3, p21
- ISSN
2325-4688
- Publication type
Article