Financial ratios are used to perform analysis on numbers found in company financial statements to assess the leverage, liquidity, valuation, growth, and profitability of a business.
Coverage Ratios
Coverage ratios help you to assess whether a business is operating with a healthy amount of debt, or if it is being overextended.
Efficiency Ratios
Efficiency ratios are used to measure the ability of a company to use its assets to earn revenue.
Liquidity Ratios
Liquidity ratios are used to measure the ability of a company to pay its short-term debts using liquid assets.
Profitability Ratios
Profitability ratios are used to measure the ability of a company to generate earnings (profit) relative to the resources.
Solvency Ratios
Solvency and leverage ratios measure how well a company can meet its long-term debt commitments.
Valuation Ratios
Valuation ratios are used to determine the value of a stock when compared to a certain measure like profits or enterprise value.
What are financial ratios?
Financial ratios are simple formulas or fractions that you can use to compare two different items from a company’s financial statements.
The reason we do this is that these ratios can give you a lot more insight into how the company is performing than by looking at those financial statement line items separately.
Let’s say you are a brand new company and we're looking at the balance sheet of your company. You have current assets of $1,000 split between cash ($500) and inventory that you intend to sell ($500).
This is a startup, so you’re doing the work yourself, but you needed materials to build the product you’re selling. You went to a supplier and got the materials needed and, for that, you paid $2,000 on net 30 terms.
That $2,000 is your current liabilities that you need to pay within 30 days and if you just looked at current assets and liabilities as lines on your balance sheet, it doesn’t tell you much.
But if we use the “quick ratio“, which is a measure of the liquidity of your company, we can see a problem:
.png?width=392&name=Screenshot%20(44).png)
You only have $500 in cash. This is only enough to cover 25% of your liabilities. What if you don’t sell your inventory in the next 30 days? Your business will struggle to repay the supplier and you’ll be in real trouble.
By using financial ratios, you can compare a lot of different business metrics to more deeply understand just what is going on with the company.
There are generally five types of financial ratio: (1) profitability, (2) liquidity, (3) management efficiency, (4) leverage, and (5) valuation & growth.
List of Financial Ratios
We’ve covered a lot of financial ratios on Study Finance (too many to list all on one page).
Below is the latest we’ve written in each category of ratio and, if you want more, you can click the links above to explore the ratio types and all of the examples we have.
Each ratio article will provide a detailed overview of the ratio, what it’s used for, and why.
They also explain the formula behind the ratio and provide examples and analysis to help you understand them.
Coverage Ratios
- Debt Service Coverage Ratio
- Cash Flow Coverage Ratio
- Asset Coverage Ratio
- Interest Coverage Ratio
- Preferred Dividend Coverage Ratio
- Debt to Capital Ratio
- Debt to Income Ratio (DTI)
- Fixed Charge Coverage Ratio
- Cash Flow to Debt Ratio
Efficiency Ratios
- Asset Turnover
- Inventory Turnover
- Net Income
- Accounts Receivables Turnover
- Sales to Administrative Expense (SAE) Ratio
- Gross vs Net Income
- Return on Operating Assets (ROOA)
- Accounts Payable Turnover Ratio
- Equity Multiplier
- Days Sales in Inventory (DSI)
- Fixed Asset Turnover Ratio (FAT)
- Days Working Capital
- Working Capital Turnover Ratio
- Days Cash on Hand
- Capital Intensity Ratio
- Sales to Equity Ratio
- Inventory to Sales Ratio
- Sales to Fixed Assets Ratio
- Repairs and Maintenance Expense to Fixed Assets Ratio
- Investment Turnover Ratio
- Sales to Operating Income Ratio
Liquidity Ratios
- Net Working Capital
- Current Ratio
- Quick Ratio
- Cash Ratio
- Cash Conversion Cycle (CCC)
- Working Capital Ratio
- Z-Score
- Days Sales Outstanding (DSO)
- Average Inventory Period
- Days Payable Outstanding (DPO)
- Defensive Interval Ratio (DIR)
- Average Payment Period (APP)
- Sales to Working Capital Ratio
- Cash to Current Liabilities Ratio
- Working Capital to Debt Ratio
- Cash Flow Adequacy Ratio
- Sales to Current Assets Ratio
- Cash to Current Assets Ratio
- Cash to Working Capital Ratio
- Inventory to Working Capital Ratio
- Net Debt
Profitability Ratios
- Capital Gains Yield
- Gross Profit Margin
- Contribution Margin
- Earnings Before Interest and Taxes (EBIT)
- Earnings Per Share
- Earnings Before Interest, Taxes and Amortization (EBITA)
- Profit Margin
- Net Present Value (NPV)
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Return On Equity
- Return On Investment (ROI)
- Net Profit Margin
- Return On Assets (ROA)
- Break-Even Point Analysis
- Capitalization Ratio
- Return On Sales
- Return on Net Assets
- Return on Invested Capital (ROIC)
- Operating Margin Ratio
- Margin of Safety (MOS)
- Net Interest Margin (NIM)
- Net Operating Profit After Tax (NOPAT)
- Return on Retained Earnings (RORE)
- Return on Capital Employed (ROCE)
- Marginal Revenue
- Operating Leverage (DOL)
- Gross Margin Ratio
- Goodwill to Assets Ratio
- Net Operating Income (NOI)
- Expense Ratio
- DuPont Analysis
- Cost of Goods Sold (COGS)
- Return on Debt Ratio (ROD)
- Operating Cash Flow Margin
- Operating Income
- Return On Average Equity Ratio
- Return On Revenue (ROR)
- Cash Return On Assets Ratio
- Cash Earnings Per Share (Cash EPS)
- Cash Turnover Ratio (CTR)
- Return on Research Capital (RORC)
Solvency Ratios
- Debt to Equity
- Current Yield
- Debt Ratio
- Equity Ratio
- Debt to Asset Ratio
- Loan to Value Ratio (LTV)
- Times Interest Earned Ratio
- Long Term Debt to Total Assets (LTD/TA)
- Long Term Debt to Capitalization Ratio
- Long-Term Debt Ratio
- Long Term Debt to Equity Ratio
- Non-Current Assets to Net Worth Ratio
- Debt to Net Worth Ratio
- Fixed Assets to Net Worth Ratio
- Debt to EBITDA Ratio
- Net Debt to EBITDA Ratio
- Financial Leverage Index
- Interest Expense to Debt Ratio
Valuation Ratios
- Dividend Yield
- Capital Asset Pricing Model
- Internal Rate of Return
- Price to Earnings Ratio
- Weighted Average Cost of Capital (WACC)
- Price to Sales Ratio
- Rule of 72
- Free Cash Flow to Equity (FCFE)
- Annual Percentage Yield
- Doubling Time (Rule of 70)
- Dividend Per Share
- Dividend Payout Ratio
- Book Value Per Share
- Price To Book Ratio
- Holding Period Return (HPR)
- Retention Ratio (Plowback Ratio)
- Sortino Ratio
- Sharpe Ratio
- Residual Income (RI)
- Treynor Ratio
- Price to Cash Flow Ratio
- Net Fixed Assets
- Enterprise Value (EV)
- Accumulated Depreciation to Fixed Assets Ratio
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow (FCF)
- PEG Ratio
- Correlation Coefficient
- Free Cash Flow to Sales Ratio
- Cash Reinvestment Ratio
- Price Earnings to Growth and Dividend Yield (PEGY)
FAQs
1. What are financial ratios?
Financial ratios are simple formulas or fractions that you can use to compare two different items from a company’s financial statements. The reason we do this is that these ratios can give you a lot more insight into how the company is performing than by looking at those financial statement line items separately.
2. What are the pros and cons of the use of financial ratios?
The pros of the use of financial ratios are that they can help you quickly measure a company’s performance and overall financial health.
The cons of the use of financial ratios are that they can be easily manipulated and, if used improperly, can give you a false sense of security about a company’s financial state.
3. What are the types of financial ratios?
There are generally five types of financial ratratios1) profitability, (2) liquidity, (3) management efficiency, (4) coverage, (5) valuation, and (6) solvency.
4. What do financial ratios show you?
Financial ratios show you how a company is performing by comparing different financial metrics to each other. They also show you a company’s overall financial health.
5. Who uses financial ratio analysis?
Financial ratio analysis is usually used by investors, analysts, and creditors.
