How To Find Common Ratio

Financial Ratios

The use of financial figures to gain significant information about a company

What are Financial Ratios?

Fiscal ratios are created with the employ of numerical values taken from financial statements to gain meaningful information about a visitor. The numbers found on a company's financial statements – residue sheet, income argument, and cash flow statement – are used to perform quantitative analysis and assess a company'south liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.

Financial Ratios

Fiscal ratios are grouped into the following categories:

Liquidity ratios
Leverage ratios
Efficiency ratios
Profitability ratios
Marketplace value ratios

Uses and Users of Financial Ratio Assay

Analysis of financial ratios serves ii main purposes:

ane. Track visitor performance

Determining individual financial ratios per menstruation and tracking the change in their values over fourth dimension is done to spot trends that may be developing in a visitor. For example, an increasing debt-to-asset ratio may bespeak that a visitor is overburdened with debt and may eventually be facing default risk.

two. Brand comparative judgments regarding company operation

Comparison fiscal ratios with that of major competitors is washed to identify whether a company is performing better or worse than the manufacture average. For example, comparing the return on assets betwixt companies helps an annotator or investor to make up one's mind which company is making the most efficient use of its assets.

Users of fiscal ratios include parties external and internal to the company:

External users: Financial analysts, retail investors, creditors, competitors, revenue enhancement authorities, regulatory authorities, and industry observers
Internal users: Direction squad, employees, and owners

Liquidity Ratios

Liquidity ratios are financial ratios that measure a company's power to repay both brusque- and long-term obligations. Mutual liquidity ratios include the following:

The current ratio measures a company'due south ability to pay off short-term liabilities with current avails:

Current ratio = Current assets / Current liabilities

The acid-test ratio measures a company'south ability to pay off brusk-term liabilities with quick assets:

Acid-examination ratio = Electric current assets – Inventories / Electric current liabilities

The greenbacks ratio measures a company's power to pay off short-term liabilities with cash and greenbacks equivalents:

Cash ratio = Greenbacks and Greenbacks equivalents / Electric current Liabilities

The operating cash period ratio is a measure of the number of times a company can pay off current liabilities with the greenbacks generated in a given menses:

Operating greenbacks flow ratio = Operating cash menstruum / Current liabilities

Leverage Financial Ratios

Leverage ratios measure the amount of capital that comes from debt. In other words, leverage financial ratios are used to evaluate a company'southward debt levels. Common leverage ratios include the following:

The debt ratio measures the relative corporeality of a company's assets that are provided from debt:

Debt ratio = Total liabilities / Total assets

The debt to disinterestedness ratio calculates the weight of total debt and financial liabilities confronting shareholders' disinterestedness:

Debt to disinterestedness ratio = Total liabilities / Shareholder'due south equity

The interest coverage ratio shows how easily a visitor tin can pay its interest expenses:

Interest coverage ratio = Operating income / Involvement expenses

The debt service coverage ratio reveals how easily a company tin can pay its debt obligations:

Debt service coverage ratio = Operating income / Full debt service

Efficiency Ratios

Efficiency ratios, too known as activeness fiscal ratios, are used to measure how well a company is utilizing its assets and resources. Common efficiency ratios include:

The asset turnover ratio measures a company'south ability to generate sales from avails:

Nugget turnover ratio = Internet sales / Average full avails

The inventory turnover ratio measures how many times a company'south inventory is sold and replaced over a given period:

Inventory turnover ratio = Cost of goods sold / Average inventory

The accounts receivable turnover ratio measures how many times a visitor can plough receivables into greenbacks over a given period:

Receivables turnover ratio = Net credit sales / Boilerplate accounts receivable

The days sales in inventory ratio measures the average number of days that a company holds on to inventory before selling it to customers:

Days sales in inventory ratio = 365 days / Inventory turnover ratio

Profitability Ratios

Profitability ratios mensurate a company's ability to generate income relative to revenue, balance sheet assets, operating costs, and equity. Mutual profitability financial ratios include the following:

The gross margin ratio compares the gross profit of a company to its net sales to prove how much profit a company makes later on paying its cost of goods sold:

Gross margin ratio = Gross profit / Net sales

The operating margin ratio compares the operating income of a company to its net sales to determine operating efficiency:

Operating margin ratio = Operating income / Cyberspace sales

The return on avails ratio measures how efficiently a visitor is using its assets to generate profit:

Return on assets ratio = Net income / Total avails

The return on equity ratio measures how efficiently a company is using its equity to generate profit:

Return on equity ratio = Net income / Shareholder's equity

Learn more about the different profitability ratios in the post-obit video:

Marketplace Value Ratios

Market value ratios are used to evaluate the share price of a visitor's stock. Common market value ratios include the post-obit:

The book value per share ratio calculates the per-share value of a company based on the equity available to shareholders:

Volume value per share ratio = (Shareholder's equity – Preferred disinterestedness) / Total common shares outstanding

The dividend yield ratio measures the amount of dividends attributed to shareholders relative to the marketplace value per share:

Dividend yield ratio = Dividend per share / Share cost

The earnings per share ratio measures the amount of internet income earned for each share outstanding:

Earnings per share ratio = Net earnings / Total shares outstanding

The toll-earnings ratio compares a visitor'south share price to its earnings per share:

Price-earnings ratio = Share price / Earnings per share