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Financial Ratios

The document outlines various financial ratios used to assess a company's performance, categorized into five main types: profitability, liquidity, solvency, efficiency, and market value ratios. Each category includes specific ratios, their formulas, and their purposes, such as measuring profit generation, short-term financial health, long-term stability, asset efficiency, and stock performance. This comprehensive overview serves as a guide for evaluating a company's financial health and investment potential.

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10 views2 pages

Financial Ratios

The document outlines various financial ratios used to assess a company's performance, categorized into five main types: profitability, liquidity, solvency, efficiency, and market value ratios. Each category includes specific ratios, their formulas, and their purposes, such as measuring profit generation, short-term financial health, long-term stability, asset efficiency, and stock performance. This comprehensive overview serves as a guide for evaluating a company's financial health and investment potential.

Uploaded by

zafarayub92
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

Profitability Ratios
Purpose: Measure a company’s ability to generate profit.

Ratio Formula Purpose


Gross Profit Margin (Gross Profit / Revenue) × 100 Measures basic profitability
Overall profitability after all
Net Profit Margin (Net Profit / Revenue) × 100
expenses
Return on Assets Efficiency of using assets to earn
(Net Profit / Total Assets) × 100
(ROA) profit
Return on Equity (Net Profit / Shareholders’ Equity) ×
Return on owners’ investment
(ROE) 100
Operating Margin (Operating Profit / Revenue) × 100 Profitability from core operations

2. Liquidity Ratios
Purpose: Assess the company's ability to meet short-term obligations.

Ratio Formula Purpose


Current Measures short-term financial
Current Assets / Current Liabilities
Ratio health
(Current Assets - Inventory) / Current
Quick Ratio More strict test of liquidity
Liabilities
Cash Ratio Cash & Cash Equivalents / Current Liabilities Extreme liquidity position

3. Solvency (Leverage) Ratios


Purpose: Assess long-term financial stability and debt levels.

Ratio Formula Purpose


Debt to Equity Total Debt / Shareholders’ Equity Measures leverage risk
Interest Coverage EBIT / Interest Expense Ability to pay interest on debt
Debt Ratio Total Liabilities / Total Assets Shows proportion of debt in assets

4. Efficiency (Activity) Ratios


Purpose: Measure how efficiently a company uses assets.

Ratio Formula Purpose


Inventory Turnover Cost of Goods Sold / Average Inventory How quickly inventory is sold
Ratio Formula Purpose
Receivables Net Credit Sales / Average Accounts
Efficiency in collecting debts
Turnover Receivable
Use of assets to generate
Asset Turnover Revenue / Average Total Assets
revenue
How fast company pays its
Payables Turnover Purchases / Average Accounts Payable
suppliers

5. Market Value (Investment) Ratios


Purpose: Evaluate stock performance and market perception.

Ratio Formula Purpose


Earnings Per Share (Net Income – Preferred Dividends) /
Profit per share
(EPS) No. of Shares
Price to Earnings
Market Price per Share / EPS Stock valuation
(P/E)
Return on investment from
Dividend Yield Dividend per Share / Market Price × 100
dividends
Market Price per Share / Book Value per Compares market vs book
Price to Book (P/B)
Share value

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