Types of financial indicators and their applications

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 From the same. In this regard, financial indicators can be used to compare them 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 serve to understand how the company itself is evolving and in which areas 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 you want to understand, it will be more advisable to use one or another. Nevertheless, there are some financial indicators that are particularly important, as they are the most used because they provide Basic and highly sensitive information about any company:

• Profitability indicatorThis is one of the most widely used types of indicators in many companies. It allows for the analysis of profits in comparison to the operations carried out, providing data on whether these operations are profitable or not for the company. Furthermore, it also offers information on various external and internal factors, as it allows the measurement of the profitability or otherwise of the operations undertaken. To calculate it, net profit must be divided by the assigned asset or equity. 
• Liquidity indicatorOne of the types of indicators that provides information on a company's safety and solvency is the liquidity ratio. This indicator defines a company's financial capacity to meet short-term obligations, which requires financial assets in the form of cash. In other words, assets that can easily be converted into money to pay off debts incurred. To calculate it, simply divide current assets by current liabilities, which will give us the company's liquidity ratio. 
• Asset quality indicatorsThese are various types of indicators that are grouped under this name. They have in common that they allow us to reflect the company's strengths and weaknesses by showing the real value of assets in relation to the expenses associated with said assets. Generally, their calculation is based on relating the awarded assets and overdue loans to the real capital 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 what 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, financial ratios and indicators will provide the necessary information to ascertain whether a particular part of the company is functioning correctly or incorrectly, whether it is profitable or not, as well as being of great use when identifying the company's strengths and weaknesses. 

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 the company may have. Likewise, if the indicators provide positive information about the company or any of its sectors, it will be indicative that progress is being made in the right direction, so appropriate measures should be taken to enhance those good performances.