Knowing the etymological origin of the words that shape the term financial reasons is the first thing that needs to be done in order to establish its meaning. In this regard we must know this:
-Reasons derives from the Latin "ratio", which means "reason".
-Financiers, on the other hand, emanates from the French verb “financer”, which can be translated as “defray a debt” and, in turn, comes from the Latin “finis”, which is synonymous with “end”.
The financial reasons , which are also known as financial ratios , are quotients that allow to establish comparisons between different financial data . For a financial reason to be valid, you must check information that corresponds to the same period.
Specifically, they are used with the clear objective that the reality of a company or a specific division of the company can be known in order to determine if it can carry out the process of assuming certain obligations or even new projects.
These ratios always make sense when compared in a time series. An isolated financial reason does not provide information useful with respect to a company or an organization.
There are numerous financial reasons. One of the most usual points out the liquidity of an entity and is calculated by dividing the current asset of the firm for current liabilities. In this way, the reason reveals what monetary disposition the company has to assume its immediate obligations.
Another usual financial reason is that it is revealed by the level of indebtedness with respect to assets . To calculate this ratio , there is to divide the total debt (long-term liabilities plus current liabilities) by all assets.
In addition to the two financial reasons cited, those of liquidity and indebtedness, there are two more:
-Reasons for profitability that, as its name suggests, are aimed at measuring the degree of profitability of a company in question in terms of amounts, sales or capital. In this case, the operating profit margin, gross profit margin, asset turnover, net profit margin or return on investment are used as indicators.
-Reasons for coverage. These, in turn, proceed to measure the company's ability to cover what are the obligations it has. In this case, some of the indicators used are the ratio of total coverage or total liability coverage.
By having different financial reasons, an analyst can compare different accounting periods of the company to know how it behaved. From these evaluations , you can make projections.
It can be said, in conclusion, that the financial reasons are Analysis tools that favor decision making. By knowing the reason of liquidity and compare different periods, a company manager can determine if it is a good time to incur more debt, for example.
Typically, the analyst manages not less than ten financial reasons to have a broad picture of the behavior of the company . Within these reasons, some will be more important than others when making a decision.