Financial ratios are used to evaluate a company's financial performance and position. They are calculated using various financial data from a company's financial statements, such as the balance sheet and income statement. Here are some common financial ratios and their formulas:
- Liquidity Ratios:
- Current Ratio = Current Assets / Current Liabilities
- Quick Ratio = (Current Assets - Inventory) / Current Liabilities
- Solvency Ratios:
- Debt to Equity Ratio = Total Liabilities / Shareholders' Equity
- Interest Coverage Ratio = EBIT / Interest Expense
- Profitability Ratios:
- Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue
- Net Profit Margin = Net Income / Revenue
- Return on Assets (ROA) = Net Income / Total Assets
- Return on Equity (ROE) = Net Income / Shareholders' Equity
- Efficiency Ratios:
- Asset Turnover = Revenue / Total Assets
- Inventory Turnover = Cost of Goods Sold / Average Inventory
- Days Sales Outstanding (DSO) = Accounts Receivable / (Revenue / 365 days)
- Market Ratios:
- Price to Earnings (P/E) Ratio = Market Price per Share / Earnings per Share
- Price to Book (P/B) Ratio = Market Price per Share / Book Value per Share
It is important to note that financial ratios should be compared to industry averages or previous performance to have a better understanding of the company's financial health. Additionally, it is also important to consider the limitations of financial ratios, such as the fact that they are based on historical data and may not be able to predict future performance.
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