Key Financial Ratios
- Topic
- Key Financial Ratios
- Area
- Financial Ratios
- Explanation
Financial Ratios
Financial ratios are used to analyse a company's performance and financial health.
Liquidity Ratios (Short-term solvency)
- Current Ratio: $\frac{Current \text{ Assets}}{Current \text{ Liabilities}}$ (Ideal: 2:1)
- Quick Ratio (Acid Test): $\frac{(Current \text{ Assets} - Inventory)}{Current \text{ Liabilities}}$ (Ideal: 1:1)
Profitability Ratios
- Gross Profit Margin: $\frac{Gross \text{ Profit}}{Net \text{ Sales}} \times 100%$
- Net Profit Margin: $\frac{Net \text{ Profit}}{Net \text{ Sales}} \times 100%$
- Return on Investment (ROI): $\frac{Net \text{ Profit}}{Total \text{ Investment}} \times 100%$
- Return on Equity (ROE): $\frac{Net \text{ Profit}}{Shareholders' \text{ Equity}} \times 100%$
Solvency Ratios (Long-term solvency)
- Debt-to-Equity Ratio: $\frac{Total \text{ Debt}}{Total \text{ Equity}}$
- Interest Coverage Ratio: $\frac{EBIT}{Interest \text{ Expense}}$
Efficiency Ratios
- Inventory Turnover: $\frac{COGS}{Average \text{ Inventory}}$
- Debtors' Turnover: $\frac{Net \text{ Credit Sales}}{Average \text{ Debtors}}$
- Asset Turnover: $\frac{Net \text{ Sales}}{Total \text{ Assets}}$
Market Ratios
- EPS (Earnings Per Share): $\frac{Net \text{ Profit}}{Number \text{ of } Shares \text{ Outstanding}}$
- P/E Ratio: $\frac{Market \text{ Price per Share}}{EPS}$