Financial Ratio Analysis List of Financial Ratios

The price-to-book (P/B) ratio is calculated as the market price per share divided by book value per share. The price-to-sales (P/S) ratio is calculated as the market price per share divided by sales per share. This ratio measures the value investors place on each dollar of a company’s revenue, providing insights into the market’s assessment of the firm’s sales performance and growth prospects. The quick ratio, also known as the acid-test ratio, is calculated as (current assets – inventory) divided by current liabilities. This ratio excludes inventory from current assets to measure a company’s immediate liquidity and its ability to cover short-term obligations without selling inventory. Comparing financial ratios with that of major competitors is done to identify whether a company is performing better or worse than the industry average.

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IIf the ratio increases, profit increases and reflects the business expansion. To best understand these ratios, we will explore them in the context of the category they belong to. A ratio is the relation between two amounts showing the number of times one value contains or is contained within the other. This ratio type indicates how effectively the company uses the shareholder’s money.

Key Financial Ratios

Liquidity ratios provide a view of a company’s short-term liquidity (its ability to pay bills that are due within a year). It means that a company has enough in current assets to pay for current liabilities. To compare companies within an industry using financial ratios, you can analyze industry averages, which provide context for assessing a company’s performance relative to its peers. By comparing financial ratios across companies, you can identify strengths and weaknesses and make informed investment decisions.

Debt to Equity (D/E)

• The figures used must be taken from the balance sheet of the same period.
• Investors and analysts can access years of income statements, balance sheets, and cash flow statements to calculate key ratios.
• This ratio assesses how efficiently revenue is generated through existing assets, with a higher ratio indicating more efficient asset utilization.
• The receivables turnover ratio measures how efficiently a company collects payment for credit sales during a period.
• It’s calculated by dividing a company’s net income by its revenues and is often used instead of dissecting financial statements to compare how profitable companies are.

The Ratio helps assess inventory management, production efficiency, and product demand. The inventory turnover ratio calculates how efficiently a company sells and replaces its inventory during a period. This means for every Rs.1 in fixed assets, ABC Company generated Rs.2.5 in revenue. A higher ratio is preferred, as it indicates the company is utilizing assets optimally to drive sales. The Ratio helps assess operational efficiency and how asset-intensive a business is. Return on capital employed (ROCE) measures the profitability of a company’s capital investments.

Ratio Analysis – Categories of Financial Ratios

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. These limitations include differences in accounting methods, variations in industry norms, and the risk of misinterpretation due to extraordinary events or one-time adjustments. Different industries have different set of primary and secondary ratios. A ratio that is of primary importance in one industry may be of secondary importance in another industry. Classification of ratios on the basis of importance or significance is much useful for inter-firm comparisons. Fundamental analysis contrasts with technical analysis, which focuses on determining price action and uses different tools to do so, such as chart patterns and price trends.

Vertical analysis

Investors tend to use some financial ratios more often or place more significance on certain ratios when evaluating business or companies. •   Coverage ratios, like the Debt Service Coverage Ratio and Interest Coverage Ratio, measure a company’s capacity to manage its debt obligations, providing insights into financial stability. •   Liquidity ratios, such as the Current Ratio and Quick Ratio, help assess a company’s ability to meet short-term obligations, crucial for evaluating newer firms. For example, suppose a Rs.100,000 investment is expected to produce Rs.20,000 in annual savings; the simple payback period would be five years.

Sometimes called asset efficiency ratios, turnover ratios measure how efficiently a business is using its assets. This ratio uses the information found on both the income statement and the balance sheet. Coverage ratios are financial ratios that measure how well a company manages its obligations to suppliers, creditors, and anyone else to whom it owes money. Lenders best invoice management software to streamline ap process may use coverage ratios to determine a business’s ability to pay back the money it borrows. Solvency ratios are financial ratios used to measure a company’s ability to pay its debts over the long term. As an investor, you might be interested in solvency ratios if you think a company may have too much debt or be a potential candidate for a bankruptcy filing.

That is because it relates the most liquid assets to current liabilities. These financial key ratios are extremely useful for management decision making and stakeholders understanding. They are easy to interpret as well as calculate, making them very a very important tool for company evaluation. The management, investors, analysts, etc can use analysis of financial ratios for measuring profitability, efficiency, solvency and financial position. The debt-equity ratio measures the relation between total liabilities and total equity. It shows how much vendors and financial creditors have committed to the company compared to what the shareholders have committed.

Operating cash flow can tell you how much cash flow a business generates in a given time frame. This financial ratio is useful for determining how much cash a business has on hand at any given time that it can use to pay off its liabilities. Say a company has $1 million in current assets and $500,000 in current liabilities. It has a current ratio of 2, meaning for every $1 a company has in current liabilities it has $2 in current assets. This metric can tell you how likely a company is to generate profits for its investors.

They can give investors an understanding of how inexpensive or expensive the stock is relative to the market. A smaller percentage is better because it means that a company carries less debt compared to its total assets. The total-debt-to-total-assets ratio is used to determine how much of a company is financed by debt rather than shareholder equity. A net profit margin of 1, or 100%, means a company is converting all of its revenue to net income. Under these types of financial ratios, Activity ratios show how a company utilizes its assets.

This type of financial ratio indicates how quickly total assets of a company can generate sales. Financial ratios help in trend analysis by revealing patterns and changes in a company’s financial performance over multiple periods. By examining these trends, stakeholders can assess the company’s progress, identify potential issues, and make necessary adjustments to improve financial health and performance.