Updated on February 04, 2023Table of Contents
Financial Ratios
Financial ratios are measures that compare two or more financial items to provide insights into a company’s financial performance and health. They are used by investors, analysts, and creditors to assess a company’s ability to meet its financial obligations, generate cash flow, and create value.
Common Financial Ratios:
Liquidity Ratios:– Current Ratio- Quick Ratio- Cash Ratio
Solvency Ratios:– Current Liabilities to Assets Ratio- Quick Liabilities to Assets Ratio- Debt-to-Equity Ratio
Profitability Ratios:– Gross Profit Ratio- Net Profit Ratio- Return on Investment (ROI)- Return on Equity (ROE)
Cash Flow Ratios:– Cash Flow from Operations Ratio- Cash Flow from Investing Ratio- Cash Flow from Financing Ratio
Efficiency Ratios:– Inventory Turnover Ratio- Accounts Payable Turnover Ratio- Accounts Receivable Turnover Ratio
Market-Related Ratios:– Price-to-Earnings Ratio (P/E)- Price-to-Book Ratio (P/B)- Price-to-Cash Flow Ratio
Other Important Ratios:
Uses of Financial Ratios:
Interpreting Financial Ratios:
It is important to interpret financial ratios in the context of the specific company and industry. For example, a high current ratio may indicate a company’s ability to meet current liabilities easily, but it may also indicate overstocking or excess inventory. Similarly, a high debt-to-equity ratio may indicate a company’s reliance on debt financing, which can make it more vulnerable to economic downturns.
Conclusion:
Financial ratios are an important tool for analyzing and understanding a company’s financial performance. By comparing ratios to industry benchmarks and historical data, investors, analysts, and creditors can gain valuable insights into a company’s health and potential for success.
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