What is Financial Ratio?
Financial Ratios are mathematical comparison of financial statement. Key financial ratios are used to measure, analyze and understand the financial results and trends over time. Investors and Lenders look for the key indicators such as "Return on Investments (ROI), Current Ratio, Profit Margin, Debt to Equity (D/E) Ratio, Earnings Per Share (EPS), Dividend Payout Ratio and Price to Earnings (P/E) Ratio" to make better business & investment decisions.
Financial ratios are easy to understand and simple to compute, it is often benchmarked against past performance, Industry, Sectors and another company. Most ratios can be calculated from information provided by the financial statements.
Financial ratios are broadly categorized in 5 types:
Profitability, Liquidity, Efficiency, Financial Leverage and Market Value Ratio
Profitability ratios are used to assess the company's ability to generate earnings relative to its associated expenses. A business with a higher value of return (profit) during a given period does not guarantee that it is profitable? it is better to compare with past performance that may be far more informative. Commonly used profitability ratios are Profit Margin, Return on Assets (ROA) and Return on Equity (ROE). Learn more…
Liquidity ratios are used to determine a company's ability to pay short and long-term liabilities (Loans/Bills payable). Generally, Small and Start-up businesses tend to have difficulties in paying their bills
- Investors or Lenders use "Liquidity ratios - Current ratio, Quick ratio, Cash ratio and Net working capital ratio" to analyze the financial health of a business before taking their investing or lending decision.
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Efficiency ratios also called activity ratios is used to measure a company's ability in managing its assets - cash, debt, inventory, materials and other capital assets
to turn them into sales or earnings.
Financial analysts use "Activity Ratios - Account Receivable Turnover Ratio, Inventory Turnover Ratio and Total Assets Turnover Ratio" to assess the operational efficiency.
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Financial leverage ratios are used to measure a company's long-term debt usage. Some of the commonly used ratios - Debt ratio, Debt to Equity ratio and interest coverage ratio. Debt to equity ratio or Debt ratios measure the extent to which the company is using long term-debt. Interest coverage ratio indicates how well the company's earning can cover the interest payments on its debt. Learn more…
Market value ratios are used to evaluate a company's performance from an investor's perspective. Commonly used ratios are Earnings per share (EPS), Dividend payout ratio, Price to earnings (P/E) ratio, Market value per share and Book value per share. These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or underpriced. Learn more…
Financial Ratios can help business owners and managers to compare, measure, understand the overall health of the business.
Financial Ratios vary based on the Industry, Sectors and Businesses.
We are offering 20 different ratio calculators covering the 5 key financial ratios - Profitability, Liquidity, Efficiency, Financial Leverage and Capital Market.
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