Ratio Analysis is a method of financial analysis that uses numerical values to compare different financial aspects of a business. It is used to evaluate a company's performance and financial position by comparing line items in the financial statements.
Ratio analysis is a form of financial analysis used to assess a company’s financial performance and health. It is a tool used to compare different financial metrics and ratios to identify trends and assess the company’s overall financial position. Ratios are used to measure a company’s liquidity, profitability, efficiency, and solvency.
Liquidity ratios measure a company’s ability to pay its short-term obligations. These ratios include the current ratio, quick ratio, and cash ratio. The current ratio is calculated by dividing current assets by current liabilities. The quick ratio is calculated by subtracting inventory from current assets and then dividing by current liabilities. The cash ratio is calculated by dividing cash and cash equivalents by current liabilities.
Profitability ratios measure a company’s ability to generate profits. These ratios include the gross profit margin, operating profit margin, and net profit margin. The gross profit margin is calculated by subtracting cost of goods sold from revenue and then dividing by revenue. The operating profit margin is calculated by subtracting operating expenses from revenue and then dividing by revenue. The net profit margin is calculated by subtracting all expenses from revenue and then dividing by revenue.
Efficiency ratios measure a company’s ability to use its assets and resources efficiently. These ratios include the asset turnover ratio, inventory turnover ratio, and accounts receivable turnover ratio. The asset turnover ratio is calculated by dividing revenue by total assets. The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory. The accounts receivable turnover ratio is calculated by dividing net credit sales by average accounts receivable.
Solvency ratios measure a company’s ability to meet its long-term obligations. These ratios include the debt to equity ratio, debt to asset ratio, and interest coverage ratio. The debt to equity ratio is calculated by dividing total liabilities by total equity. The debt to asset ratio is calculated by dividing total liabilities by total assets. The interest coverage ratio is calculated by dividing earnings before interest and taxes by interest expense.
Ratio analysis is a powerful tool used to assess a company’s financial performance and health. It is used to compare different financial metrics and ratios to identify trends and assess the company’s overall financial position. Ratios are used to measure a company’s liquidity, profitability, efficiency, and solvency. By understanding the different ratios and how they are calculated, investors and analysts can gain valuable insight into a company’s financial performance.