Financial ratios are calculated to give clear information about the position of any business in the market. The data for calculating financial ratios are taken from financial accounts, like balance sheet, cash flow statement, income and expenses statements, etc. These ratios can be expressed as percentages or in decimal points. The motive of analysing financial ratios is mainly to compare the financial standing of two companies or industries, or even different time periods of the same company.

Financial ratios can be segregated based on the data they provide. The main classifications of financial ratios include:

  • Liquidity Ratios: These help to identify whether a firm is capable to fulfil its short-term financial liabilities. These ratios include the following:
    • Current Ratio
    • Working capital ratio
    • Quick Ratio
    • Cash Ratio
    • Cash Conversion Ratio
  • Asset Turnover Ratios
    • Receivables Turnover Ratio
    • Average Collection Period Ratio
    • Inventory Turnover Ratio
    • Inventory Period Ratio
    • Fixed Asset Turnover Ratio
    • Total Asset Turnover Ratio
  • Financial Leverage Ratios
    • Debt Ratio
    • Debt-to-Equity Ratio
    • Capitalization Ratio
    • Interest Coverage Ratio
    • Cash Flow to Debt Ratio
  • Profitability Ratios
    • Gross Profit Margin
    • Price earnings ratio
    • Return on Assets
    • Return on Equity
    • Return on Capital Employed
    • Earnings per share
  • Dividend Ratios
    • Dividend Yield
    • Payout Ratio

Importance of Financial Ratios

It is essential to study financial ratios as they are helpful in indicating the performance and financial standing of any firm. They are also beneficial in helping individuals to compare the financial details of different firms and to evaluate trends in the market.

There are many financial ratios to calculate and each one depicts pertinent information about a business; hence, it can become somewhat complex if you don’t have the correct guidance. Do not worry as we are there to help you out. Contact us and get a dedicated team who will take care of financial ratios and also explain the nitty-gritty to you.

Assignment

1)      Find out the current ratio if the current assets of a firm are valued at $250000 and current liabilities are worth $200000

Current Ratio: Current Assets / Current Liabilities

= $250000/$200000

=1.25

2)    If the Debt equity ratio of a firm is 1.5 and its total debt is $200000, find its equity.

Debt Equity Ratio = Total debt/Equity

1.5= $200000/Equity

Equity = 200000/1.5

Equity = 133333.33