Effect of Inflation on Financial Ratios: A Research in the Manufacturing Sector Traded in Borsa Istanbul

Inflation is defined as a continuous and significant increase in the general price level, and it has profound effects on economic processes. Although this definition might seem like a superficial explanation of the phenomenon, a deeper examination reveals that the effects of inflation are quite complex and extensive. Inflation decreases the real values of assets and liabilities on the balance sheet, whereas changes in nominal values on the income statement prevent an accurate reflection of actual performance. In particular, during periods of high inflation, financial performance and business stability can be severely jeopardised. However, it is important to remember that the effects of inflation can vary depending on the sector, individual business, and economic conditions. Presenting financial statements adjusted for the effects of inflation ensures that the information is more consistent and reliable, which is crucial for users of financial statements to make more accurate decisions. To mitigate the adverse effects of inflation on financial statements, two approaches are employed: “partial adjustment methods” and “permanent adjustment methods.” This study discusses the practises used against the effects of inflation and offers suggestions on the subject. In this research, the financial ratios of companies in the manufacturing sector that traded on Borsa Istanbul (BIST) for a total of 30 periods in three-month quarters between the 2016Q2 and 2023Q3 periods were examined, and the effects of inflation on liquidity, financial structure, turnover rate, and profitability were examined. Their effects on rates were analysed. It was found that inflation has statistically significant effects on some financial ratios. These findings can help in understanding and analysing the effects of inflation on financial ratios, assisting businesses in making informed decisions and better evaluating their financial positions.