Financial Ratios are numerical values used to measure the performance of a company. They are calculated by dividing one financial statement item by another to measure the company's liquidity, profitability, and solvency.
Financial ratios are a set of metrics used to measure the performance of a company. They are used to compare a company’s performance to that of its peers, industry averages, and other benchmarks. Financial ratios are calculated by dividing one financial metric by another.
The most common financial ratios are liquidity ratios, profitability ratios, solvency ratios, and efficiency ratios. Liquidity ratios measure a company’s ability to pay its short-term obligations. Examples of liquidity ratios include the current ratio, quick ratio, and cash ratio. Profitability ratios measure a company’s ability to generate profits. Examples of profitability ratios include the gross profit margin, operating profit margin, and net profit margin. Solvency ratios measure a company’s ability to pay its long-term obligations. Examples of solvency ratios include the debt-to-equity ratio and the interest coverage ratio. Efficiency ratios measure a company’s ability to use its assets efficiently. Examples of efficiency ratios include the inventory turnover ratio and the asset turnover ratio.
Financial ratios are important for investors, creditors, and other stakeholders because they provide insight into a company’s financial health. They can be used to identify potential problems and opportunities, and to compare a company’s performance to that of its peers. Financial ratios should be used in conjunction with other financial information, such as financial statements and cash flow statements, to get a complete picture of a company’s financial health.