Financial Ratios Complete List and Guide to All Financial Ratios

This category of ratios measures a company’s ability to generate profits from its overall revenue figures by considering expenses or equity. Debt ratios measure a company’s long-term ability to pay off its debt obligations. For example, the inventory turnover ratio is an important accounting ratio in the retail industry but it has almost no significance for a boutique advisory firm.

Having a well-defined liquidity ratio is a signal of competence and sound business performance that can lead to sustainable growth. As you can see from the examples of accounting ratios above, the gross profit margin is much higher than the net profit margin. The cash flow coverage ratio measures a company’s ability to pay obligations with operating cash flows. They typically measure current business liabilities and liquid assets to determine your company’s likelihood of repaying short-term debts.

A balance sheet can provide investors and financial institutions with a complete snapshot of a company’s financial health as of any specific date.
Individual ratios can be grouped in multiple categories as there is overlap in the categorization.
Profitability Ratios measure the company’s capability and efficiency in utilizing its capital in order to generate revenue and ultimately profits.

The ratio measures the value of a company’s dividends compared to the market share. To measure revenue generation, divide net sales by the average total assets over a specific period. A higher asset turnover ratio is better, showing the company produces more sales per asset owned and indicates an efficient use of those assets. A high debt to equity ratio means the company has excessive debt and may be unable to repay those debts. To say it another way – the ratio indicates a company’s reliance on debt rather than equity to finance assets.

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A debt-to-equity ratio, sometimes known as a debt-to-asset ratio, displays the ratio of company liabilities to shareholder equity. This is a good indicator of how much of your business assets are financed by debt such as loans, and how much are financed by owner equity. A quick ratio can be used to evaluate the ability of your business to meet its immediate financial obligations. Quick ratio numbers are obtained from your balance sheet and compare your asset total with your liability total. While ratio analysis can be complex, and a thorough job may be better suited to your CPA, performing basic accounting ratios is a simple process any business owner can do.

This process called ratio analysis allows a company to gain better insights to how it is performing over time, against competition, and against internal goals.
The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets.
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A company can perform ratio analysis over time to get a better understanding of the trajectory of its company.
Efficiency ratios measure a company’s ability to convert its production into cash.

These assets are known as “quick” assets since they can quickly be converted into cash. The price-to-earnings (P/E) ratio is a measure of how much investors are willing to pay for each dollar of a company’s earnings. The P/E ratio is calculated by dividing the market price of a share tangible assets overview of physical items of value for business by the earnings per share. Debt ratios measure the debt of a company relative to various other figures and a company’s long-term ability to pay off its debt obligations. Accounting Ratios are indicators of a company’s financial health, including profitability and liquidity.

They paint a picture of where a company came from, how they are doing currently, and where they are going into the future. The ratios may seem simple at first, but they are incredibly nuanced and can be difficult to calculate once one is attempting to analyze and quantify Fortune 500 companies. A company may be thrilled with this financial ratio until it learns that every competitor is achieving a gross profit margin of 25%. Ratio analysis is incredibly useful for a company to better stand how its performance compares to similar companies.

How Do the Quick and Current Ratios Differ?

Ratio analysis is important because it may portray a more accurate representation of the state of operations for a company. Though this seems ideal, the company might have had a negative gross profit margin, a decrease in liquidity ratio metrics, and lower earnings compared to equity than in prior periods. Static numbers on their own may not fully explain how a company is performing. This is because the formula’s numerator (the most liquid current assets) will be higher than the formula’s denominator (the company’s current liabilities).

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The higher the gross profit margin, the better, as it indicates that a company is keeping a higher proportion of revenues as profit rather than expenses. Often, accounting ratios are calculated yearly or quarterly, and different ratios are more important to different industries. For example, the inventory turnover ratio would be significantly important to a retailer but with almost no significance to a boutique advisory firm.

What is an accounting ratio?

To understand a company’s stock valuation, divide the stock price by the earnings per share. This ratio can also calculate how long it will take to move the on-hand inventory. A higher ratio outcome is generally a more positive indicator of profitability. The ratios track overall financial performance and allow management, investors, and key stakeholders to make data-backed decisions. Similarly, ratios were worked out for Telecommunication Industry players and the same was compared with the financials of Motorola.

We’ll highlight commonly used accounting ratios to help you understand how they can benefit your business. While the thought of calculating ratios may be intimidating to some, even if you’re not a CPA, accounting ratios can provide you with important information about your business. Here are a few accounting ratios you can easily calculate that provide you with the information you need. The examples above are just a few of the many accounting ratios that corporations and analysts utilize to evaluate a company. Accounting ratios come with wide-reaching use and necessity, even for those of us who are not accountants. Many of us like to invest money that we look at as long- or short-term opportunities.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. It is important to remember that no single ratio provides a comprehensive picture of a company’s operations but it does provide useful information relating to a specific aspect of the company. If a company does not have sufficient liquidity, then it could tip over into bankruptcy. To calculate the dividend yield, measure the value of dividends received for each share owned against the stock price. To analyze the inventory sales rate, divide COGS by the average inventory of the assessed period. Enter your name and email in the form below and download the free template now!

How to Use Accounting Ratios in Your Business

Operating profit as a percentage of sales is referred to as operating margin. For example, if the operating profit is $60,000 and sales are $100,000, the operating profit margin is 60%. The income statement contains information about company sales, expenses, and net income. It also provides an overview of earnings and the number of shares outstanding used to calculate earnings per share (EPS). These are some of the most popular data points analysts use to assess a company’s profitability.