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Use of Financial Ratios
Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when performing
financial ratio analysis is trend analysis. Financil ratios are derived from the three financial statemtents;
Balance Sheet,
Income Statement and
Statement of Cash Flows.
There are five (5) major categories included in the financial ratios list are:
- Liquidity Ratios
- Activity Ratios
- Debt Ratios
- Profitability Ratios
- Market Ratios
Liquidity Ratios
Liquidity ratios measure whether there will be enough cash to pay vendors and creditors of the company.
Current Ratio
Acid Test Ratio(Quick Ratio)
Activity Ratios
Activity ratios measure how long it will take the company to turn assets into cash.
Daily Sales Outstanding(DSO)
Accounts Receivable Turnover
Daily Payable Outstanding
Accounts Payable Turnover
Inventory Days Outstanding
Inventory Turnover
Debt Ratios
Debt ratios measure the ability of the company to pay its' long term debt.
Debt Ratio
Debt to Equity Ratio(D/E Ratio)
Long Term Debt to Total Asset Ratio
Times Interest Earned Ratio
Fixed Charge Coverage Ratio
Debt Service Coverage Ratio (DSCR)
Profitability Ratios
The profitability ratios measure the profitability and efficiency in how the company deploys assets to generate a profit.
Gross Profit Margin
Operating Profit Margin Ratio
Net Profit Margin
Return on Equity Ratio(ROE Ratio)
Return on Investment Ratio (ROI Ratio)
Market Ratios
The market ratios measure the comparative value of the company in the marketplace.
Price Earnings Ratio(P/E Ratio)
Earnings per Share (EPS)
Price to Book Value Ratio(PBV Ratio)
Price to Sales Ratio
Price Earnings Growth Ratio(PEG Ratio)
Dividend Yield