Financial/Business Ratio

Financial ratios are essential tools for evaluating a company’s performance, stability, and growth potential. They help stakeholders assess liquidity, debt levels, operational efficiency, profitability, and market valuation.

Liquidity Ratio

These measure a company’s ability to meet short-term obligations:

• Current Ratio: Current Assets / Current Liabilities
  Indicates short-term solvency; a ratio ≥1 is generally healthy.

• Quick Ratio (Acid-Test): (Current Assets – Inventory) / Current Liabilities
  Excludes inventory to assess immediate liquidity.

• Cash Ratio: Cash and Equivalents / Current Liabilities
  Measures the ability to settle liabilities with cash alone.

Leverage Ratio

Evaluate a company’s debt relative to its equity or assets:

• Debt-to-Equity Ratio: Total Debt / Total Equity
  High ratios signal heavy reliance on debt financing

• Debt-to-Assets Ratio: Total Debt / Total Assets
  Shows the proportion of assets funded by debt.

• Interest Coverage Ratio: EBIT / Interest Expenses
  Assesses ability to pay interest on debt.

Efficiency Ratios

Gauge how effectively resources are utilized:

• Asset Turnover Ratio: Net Sales / Average Total Assets
  Reflects efficiency in generating revenue from assets.

• Efficiency Ratio: Operating Expenses / Total Revenues
  Lower ratios indicate better cost management

Profitability Ratios

Measure earnings performance:

• Gross Margin: Gross Profit / Net Sales
  Compares profit after production costs

• Operating Margin: Operating Income / Net Sales
  Evaluates profit after operating expenses.

• Return on Equity (ROE): Net Income / Total Equity
  Indicates profit generated from shareholders’ investments.

• Return on Assets (ROA): Net Income / Total Assets
  Shows how efficiently assets generate profit.

Market Value Ratios

Used to assess stock valuation for publicly traded companies:

• Price-to-Earnings (P/E) Ratio: Market Price per Share / Earnings per Share
  Helps determine if a stock is over- or undervalued.

• Dividend Yield: Annual Dividends per Share / Market Price per Share
  Measures return on investment via dividends.

• Earnings per Share (EPS): (Net Income – Preferred Dividends) / Average Shares Outstanding
  Reflects profitability per share.

Ratios are most valuable when compared to industry benchmarks, historical data, or competitors (e.g., gross margin comparisons). No single ratio provides a complete picture. For instance, high liquidity but low profitability may indicate inefficiency.

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