Financial Ratios (2024)

FAQs

What are the 5 key financial ratios? ›

Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.

Financial ratios are useful tools for investors to better analyze financial results and trends over time. These ratios can also be used to provide key indicators of organizational performance, making it possible to identify which companies are outperforming their peers.

The higher the ratio, the higher its liquidity. However, the ideal current ratio is 2:1. Anything higher than this indicates the company is not putting its excess cash to good use. However, there is one drawback of the current ratio that it cannot be used in isolation to compare different companies.

Gross profit margin, also known as gross margin, is one of the most widely used profitability ratios. Gross profit is the difference between sales revenue and the costs related to the products sold, the aforementioned COGS.

The profit/loss ratio is the average profit on winning trades divided by the average loss on losing trades over a specified time period.

A ratio of 1 or greater is considered acceptable for most businesses. Indicates a company's ability to pay immediate creditor demands, using its most liquid assets.

How to tell if a company is doing well financially? ›

The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0. While some very large companies in fixed asset-heavy industries (such as mining or manufacturing) may have ratios higher than 2, these are the exception rather than the rule.

A turnover ratio in business is a measurement of the firm's efficiency. It is calculated by dividing annual income by annual liability. It can be applied to the cost of inventory or any other business cost. Unlike in investing, a high turnover ratio in business is almost always a good sign.

The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.

What are the five methods of financial statement analysis? There are five commonplace approaches to financial statement analysis: horizontal analysis, vertical analysis, ratio analysis, trend analysis and cost-volume profit analysis. Each technique allows the building of a more detailed and nuanced financial profile.

You can analyse many ratios, but the six best financial ratios to track for small businesses are quick ratio, debt-to-equity ratio, working capital ratio, gross profit ratio, inventory ratio and return on equity ratio.