Types of financial indicators and their applications

There are different types of financial indicators that provide very useful information about the state of a company and its finances. In fact, these indicators can predict the possibility of bankruptcy or the clear improvement of a company's financial statements, so their use has many applications that will be vital for the proper functioning of the company.

What are financial indicators?

Financial indicators, or financial ratios, are measures that indicate different elements of a company's finances and that serve as a means of ascertaining the state of the accounts of the company. In this sense, financial indicators can be used to compare with the company's performance in another specific financial period, to compare it with other companies in the sector, or directly with the leading company, which will help to understand how the company itself is evolving and where reforms or changes may be necessary. 

Types of financial indicators that exist

The types of financial indicators that can be found are very varied and, depending on the area of the company that you want to know, it will be more appropriate to use one or another. However, there are some financial indicators that are particularly important, since they are the most widely used because they provide basic and highly sensitive information over any company:

• Profitability indicatorThis is one of the most widely used types of indicators in many companies. It allows to analyse the profits compared to the operations carried out, which provides data on whether these operations are being profitable or not for the company. In addition, it also provides information on several external and internal factors, as it allows measuring the profitability or not of the operations carried out. To calculate it, the net profit must be divided by the assigned assets or equity. 
• Liquidity indicatorLiquidity indicator: One of the types of indicators that provides information on the security and solvency of the company is the liquidity indicator. This indicator defines the company's financial capacity to meet short-term obligations, for which it is necessary to have financial assets in the form of cash. In other words, assets that can be easily converted into cash to meet the payment of contracted debts. To calculate it, simply divide current assets by current liabilities, which will give us the company's liquidity indicator. 
• Asset quality indicatorsIndicators: Several types of indicators are grouped under this name. What they have in common is that they reflect the company's strengths and weaknesses by showing the real value of assets in relation to the expenses associated with those assets. Generally, their calculation is based on the ratio of foreclosed assets and overdue loans to the actual assets available to the company. 

Uses and applications of different financial indicators

As can be seen, the different types of financial indicators make it possible to obtain a concrete, quantifiable and comparable data which can be used to analyse the state of the company's finances in different areas. Its use is for information purposes only. In other words, what the financial ratios will do is to provide the necessary information to know whether a certain part of the company is functioning correctly or incorrectly, whether it is profitable or not, as well as to be of great use in identifying the strengths and weaknesses of the company. 

However, it is essential to be clear that these indicators alone will not be able to solve the problems when they are located, but rather, after their identification, it will be necessary to undertake the appropriate reforms or solutions in each case to solve the different problems that the company may have. Likewise, if the indicators provide positive information on the company or any of its sectors, it will be an indication that progress is being made in the right direction, and therefore the appropriate measures should be taken to strengthen these good performances.