Depending on the industry and the specific needs of the analysis, various combinations of business ratios can be used to gain a comprehensive understanding of a company's financial health and operations.
Business ratios are financial metrics that provide insights into a company's financial health, performance, and efficiency. Here are some common types of business ratios:
Liquidity Ratios: Current Ratio: Measures a company's ability to pay short-term obligations.
Quick Ratio (Acid-Test Ratio): Measures a company's ability to meet short-term obligations with its most liquid assets.
Cash Ratio: Measures a company's ability to pay its short-term liabilities using only cash and cash equivalents.
Solvency Ratios:
Debt-to-Equity Ratio: Measures the degree of financial leverage used by a company.
Debt-to-Assets Ratio: Measures the proportion of a company's assets that are financed by debt.
Interest Coverage Ratio: Measures a company's ability to meet its interest payment obligations.
Profitability Ratios of Organizational Operation:
-Gross Profit Margin: Measures the percentage of revenue left after deducting the cost of goods sold.
-Net Profit Margin: Measures the percentage of revenue remaining after all expenses have been deducted.
-Return on Assets (ROA): Measures the efficiency of a company's use of its assets to generate profit.
-Return on Equity (ROE): Measures the rate of return on the money invested by the company's shareholders.
Activity Ratios of Business Operation:
-Inventory Turnover Ratio: Measures how quickly a company sells its inventory.
-Accounts Receivable Turnover Ratio: Measures how quickly a company collects its accounts receivable.
-Accounts Payable Turnover Ratio: Measures how quickly a company pays its accounts payable.
Asset Turnover Ratio: Measures the efficiency of a company's use of its assets to generate revenue.
Market-Based Ratios of Operation:
-Earnings per Share (EPS): Measures the amount of a company's profit allocated to each outstanding share of common stock.
-Price-to-Earnings (P/E) Ratio: Measures the relationship between a company's stock price and its earnings per share.
-Dividend Yield: Measures the annual dividend paid per share relative to the current stock price.
These are just a few examples of the many business ratios that can be used to analyze a company's financial performance, liquidity, solvency, profitability, and market valuation. Depending on the industry and the specific needs of the analysis, various combinations of business ratios can be used to gain a comprehensive understanding of a company's financial health and operations.
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