research on financial ratios

What is Ratio Analysis?

Uses of ratio analysis.

• Ratio Analysis - Categories of Financial Ratios

Related Readings

Ratio analysis.

Comparisons between the financial information in the financial statements of a business

Ratio analysis refers to the analysis of various pieces of financial information in the financial statements of a business. They are mainly used by external analysts to determine various aspects of a business, such as its profitability, liquidity, and solvency.

Analysts rely on current and past financial statements to obtain data to evaluate the financial performance of a company. They use the data to determine if a company’s financial health is on an upward or downward trend and to draw comparisons to other competing firms.

1. Comparisons

One of the uses of ratio analysis is to compare a company’s financial performance to similar firms in the industry to understand the company’s position in the market. Obtaining financial ratios, such as Price/Earnings, from known competitors and comparing them to the company’s ratios can help management identify market gaps and examine its competitive advantages , strengths, and weaknesses. The management can then use the information to formulate decisions that aim to improve the company’s position in the market.

2. Trend line

Companies can also use ratios to see if there is a trend in financial performance. Established companies collect data from financial statements over a large number of reporting periods. The trend obtained can be used to predict the direction of future financial performance , and also identify any expected financial turbulence that would not be possible to predict using ratios for a single reporting period.

3. Operational efficiency

The management of a company can also use financial ratio analysis to determine the degree of efficiency in the management of assets and liabilities. Inefficient use of assets such as motor vehicles, land, and buildings results in unnecessary expenses that ought to be eliminated. Financial ratios can also help to determine if the financial resources are over- or under-utilized.

Ratio Analysis – Categories of Financial Ratios

There are numerous financial ratios that are used for ratio analysis, and they are grouped into the following categories:

1. Liquidity ratios

Liquidity ratios measure a company’s ability to meet its debt obligations using its current assets. When a company is experiencing financial difficulties and is unable to pay its debts, it can convert its assets into cash and use the money to settle any pending debts with more ease.

Some common liquidity ratios include the quick ratio , the cash ratio, and the current ratio. Liquidity ratios are used by banks, creditors, and suppliers to determine if a client has the ability to honor their financial obligations as they come due.

2. Solvency ratios

Solvency ratios measure a company’s long-term financial viability. These ratios compare the debt levels of a company to its assets, equity, or annual earnings.

Important solvency ratios include the debt to capital ratio, debt ratio, interest coverage ratio, and equity multiplier. Solvency ratios are mainly used by governments, banks, employees, and institutional investors.

3. Profitability Ratios

Profitability ratios measure a business’ ability to earn profits, relative to their associated expenses. Recording a higher profitability ratio than in the previous financial reporting period shows that the business is improving financially. A profitability ratio can also be compared to a similar firm’s ratio to determine how profitable the business is relative to its competitors.

Some examples of important profitability ratios include the return on equity ratio, return on assets, profit margin, gross margin, and return on capital employed .

4. Efficiency ratios

Efficiency ratios measure how well the business is using its assets and liabilities to generate sales and earn profits. They calculate the use of inventory, machinery utilization, turnover of liabilities, as well as the usage of equity. These ratios are important because, when there is an improvement in the efficiency ratios, the business stands to generate more revenues and profits.

Some of the important efficiency ratios include the asset turnover ratio , inventory turnover, payables turnover, working capital turnover, fixed asset turnover,  and receivables turnover ratio.

5. Coverage ratios

Coverage ratios measure a business’s ability to service its debts and other obligations. Analysts can use the coverage ratios across several reporting periods to draw a trend that predicts the company’s financial position in the future. A higher coverage ratio means that a business can service its debts and associated obligations with greater ease.

Key coverage ratios include the debt coverage ratio, interest coverage, fixed charge coverage, and EBIDTA coverage.

6. Market prospect ratios

Market prospect ratios help investors to predict how much they will earn from specific investments. The earnings can be in the form of higher stock value or future dividends. Investors can use current earnings and dividends to help determine the probable future stock price and the dividends they may expect to earn.

Key market prospect ratios include dividend yield, earnings per share, the price-to-earnings ratio , and the dividend payout ratio.

Thank you for reading CFI’s guide to Ratio Analysis. To keep learning and advancing your career, the following CFI resources will be helpful:

• Analysis of Financial Statements
• Current Ratio Formula
• Financial Analysis Ratios Glossary
• Limitations of Ratio Analysis
• See all accounting resources
• See all capital markets resources
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Financial Ratios (Explanation Part 1)

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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Author: Harold Averkamp, CPA, MBA

Introduction to Financial Ratios

Financial Ratios Using Balance Sheet Amounts

Financial Ratios Using Income Statement Amounts

Financial Ratios Using Amounts from the Balance Sheet and Income Statement

Financial Ratios Using Cash Flow Statement Amounts, Other Financial Ratios, Benefits and Limitations of Financial Ratios, Vertical Analysis, Horizontal Analysis

Financial Ratios Practice Calculations

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Financial ratios relate or connect two amounts from a company’s financial statements (balance sheet, income statement, statement of cash flows, etc.). The purpose of financial ratios is to enhance one’s understanding of a company’s operations, use of debt, etc.

The use of financial ratios is also referred to as financial ratio analysis or ratio analysis . That along with vertical analysis and horizontal analysis (all of which we discuss) are part of what is known as financial statement analysis .

Benefit of Financial Ratios

A significant benefit of calculating a company’s financial ratios is being able to make comparisons with the following:

• The averages for the industry in which the company operates
• The ratios of another company in its industry
• Its own ratios from previous years
• Its planned ratios for the current and future years

The comparisons may direct attention to areas within a company that need improvement or where competitors are more successful.

Limitations of Financial Ratios

Some of the limitations of financial ratios are:

They are based on just a few amounts taken from the financial statements from a previous year. Current and future years could be different due to innovations, economic conditions, global competitors, etc.

The comparison is useful only with companies in the same industry. This becomes difficult when other companies operate in several industries and their financial statements report only consolidated amounts.

Companies may apply accounting principles differently. For instance, some U.S. companies use LIFO to assign costs to its inventory and cost of goods sold, while some use FIFO . Some companies will be more conservative when estimating the useful life of equipment, when recording an expenditure as an expense rather than as an asset, and more.

Since financial statements reflect the historical cost principle, some of a company’s most valuable assets (trade names, logos, unique reputation, etc. that were developed internally) are not reported on the company’s balance sheet.

They provide a minuscule amount of information compared to the information included in the five main financial statements and the publicly traded corporation’s annual report to the U.S. Securities and Exchange Commission (SEC Form 10-K).

Our Discussion of 15 Financial Ratios

Our explanation will involve the following 15 common financial ratios:

Part 2: Financial ratios using balance sheet amounts

• Ratio #1 Working capital
• Ratio #2 Current ratio
• Ratio #3 Quick (acid test) ratio
• Ratio #4 Debt to equity ratio
• Ratio #5 Debt to total assets

Part 3: Financial ratios using income statement amounts

• Ratio #6 Gross margin (gross profit percentage)
• Ratio #7 Profit margin
• Ratio #8 Earnings per share
• Ratio #9 Times interest earned (interest coverage ratio)

Part 4: Financial ratios using amounts from the balance sheet and the income statement

• Ratio #10 Receivables turnover ratio
• Ratio #11 Days’ sales in receivables (average collection period)
• Ratio #12 Inventory turnover ratio
• Ratio #13 Days’ sales in inventory (days to sell)
• Ratio #14 Return on stockholders’ equity

Part 5: Financial ratios using cash flow statement amounts

• Ratio #15 Free cash flow

Part 5 also includes a discussion of vertical analysis (resulting in common-size income statements and balance sheets) and horizontal analysis (resulting in comparative financial statements and trends over longer time periods).

Part 6 will give you practice examples (with solutions) so you can test yourself to see if you understand what you have learned. Calculating the 15 financial ratios and reviewing your answers will improve your understanding and retention.

NOTE: If you want to learn more about financial statements, click any of the topics below:

• Financial Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Working Capital and Liquidity

Please let us know how we can improve this explanation

A type of financial analysis involving income statements and balance sheets. All income statement amounts are divided by the amount of net sales so that the income statement figures will become percentages of net sales. All balance sheet amounts are divided by total assets so that the balance sheet figures will become percentages of total assets.

One component of financial statement analysis. This method involves financial statements reporting amounts for several years. The earliest year presented is designated as the base year and the subsequent years are expressed as a percentage of the base year amounts. This allows the analyst to more easily see the trend as all amounts are now a percentage of the base year amounts.

A cost flow assumption where the last (recent) costs are assumed to flow out of the asset account first. This means the first (oldest) costs remain on hand. To learn more, see Explanation of Inventory and Cost of Goods Sold .

A cost flow assumption where the first (oldest) costs are assumed to flow out first. This means the latest (recent) costs remain on hand. To learn more, see Explanation of Inventory and Cost of Goods Sold .

The original cost incurred to acquire an asset (as opposed to replacement cost, current cost, or cost adjusted by a general price index). If a company purchased land in 1980 for $10,000 and continues to hold that land, the company’s balance sheet in the year 2024 will report the land at $10,000 (even if the land is now worth $400,000).

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Financial Ratio Analysis

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Financial ratios are mathematical comparisons of financial statement accounts or categories. These relationships between the financial statement accounts help investors, creditors, and internal company management understand how well a business is performing and of areas needing improvement.

Financial ratios are the most common and widespread tools used to analyze a business’ financial standing. Ratios are easy to understand and simple to compute. They can also be used to compare different companies in different industries. Since a ratio is simply a mathematically comparison based on proportions, big and small companies can be use ratios to compare their financial information. In a sense, financial ratios don’t take into consideration the size of a company or the industry. Ratios are just a raw computation of financial position and performance.

Ratios allow us to compare companies across industries, big and small, to identify their strengths and weaknesses. Financial ratios are often divided up into seven main categories: liquidity, solvency, efficiency, profitability, market prospect, investment leverage, and coverage.

• Liquidity Ratios
• Solvency Ratios
• Efficiency Ratios
• Profitability Ratios
• Market Prospect Ratios
• Financial Leverage Ratios
• Coverage Ratios
• Receivables Turnover Ratio
• Asset Turnover Ratio
• Cash Conversion Cycle
• Compound Annual Growth Rate
• Contribution Margin
• Current Ratio
• Days Sales in Inventory
• Days Sales Outstanding
• Debt Service Coverage Ratio
• Debt to Equity Ratio
• Dividend Payout
• Dividend Yield
• DuPont Analysis
• Earnings per Share
• Equity Multiplier
• Equity Ratio
• Fixed Charge Coverage Ratio
• Gross Margin Ratio
• Interest Coverage Ratio
• Internal Rate of Return
• Inventory Turnover Ratio
• Net Working Capital
• Operating Margin Ratio
• Payables Turnover Ratio
• Price Earnings P/E Ratio
• Profit Margin Ratio
• Quick Ratio – Acid Test
• Retention Rate
• Return on Assets
• Return on Capital Employed
• Return on Equity
• Times Interest Earned Ratio
• Working Capital Ratio

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Financial Ratios

• Financial Ratio
• Accumulated Depreciation Ratio
• Asset Coverage Ratio
• Average Inventory Period
• Average Payment Period
• Break-Even Analysis
• Capitalization Ratio
• Cash Earnings/Share
• Cash Flow Coverage Ratio
• Correlation Coefficient
• Cost of Goods Sold
• Days Payable Outstanding
• Debt to Asset
• Debt to Capital
• Debt to Income
• Defensive Interval
• Earnings Per Share
• Enterprise Value
• Expense Ratio
• Fixed Asset Turnover Ratio
• Free Cash Flow
• Goodwill to Assets
• Gross Profit
• Gross vs Net
• Loan to Value
• Long Term Debt to Assets
• Margin of Safety
• Marginal Revenue
• Net Fixed Assets
• Net Interest Margin
• Net Operating Income
• Net Present Value (NPV)
• Net Profit Margin
• Operating Cash Flow
• Operating Income
• Operating Leverage
• Payback Period
• Preferred Dividend Coverage
• Present Value
• Price to Book
• Price to Cash Flow
• Price to Sales
• Residual Income
• Retention Ratio
• Return on Invested Capital
• Return on Investment
• Return on Net Assets
• Return on Operating Assets
• Return on Retained Earnings
• Return on Sales
• Sales to Admin Expenses
• Sharpe Ratio
• Sortino Ratio
• Treynor Ratio

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What Is a Financial Ratio? The Complete Beginner’s Guide to Financial Ratios

A financial ratio is a metric usually given by two values taken from a company’s financial statements that compared give five main types of insights for an organization. Things such as l iquidity , profitability , solvency, efficiency, and valuation are assessed via financial ratios. Those are metrics that can help internal and external management to make informed decisions about the business.

The aim of the ratio analysis isn’t necessarily to give an answer by looking at a single metric.

In many cases to have an overview of the business, it is critical to look at several metrics.

Almost like in a decision tree that branches out. That is how we find answers!

Read : Business Analysis: How To Analyze Any Business

Table of Contents

Why Ratio Analysis?

Ratio Analysis allows us to answer questions such as: How profitable is the company?

Will the organization be able to meet its obligations in the short and long term? How effectively is the organization using its resources?

Of course, some of the ratios (such as the profitability ratios) if not assessed against other ratios do not mean anything.

Also, if you want to know more about one company you have to analyze it in comparison with other companies which present the same characteristics, such as industry, geography, customers, and so on.

For example, if you are performing analysis on Apple Inc., you cannot compare its ratios with Coca-Cola.

Instead, you should compare Apple Inc. with Samsung or Microsoft. 

Therefore, the ratio analysis is a tool that gives you the opportunity to interpret the information provided by the P&L and BS to understand how the business is operating in the marketplace.

Financial Ratio Analysis and interpretation

By looking at the primary financial statements ( Balance Sheet and Income Statement), you won’t be able to find an answer unless you ask the right questions. 

Although the financial statements give you already a great deal of information about the business, there is still something missing.

Financial ratios are a simple way to interpret those financial statements to extract critical insights to assess a company from the inside or the outside. 

In short, either you are a manager looking for ways to improve your business.

Or you’re an analyst trying to figure out insights about an organization whose financial ratios will help you out. 

Key financial ratios

There are several financial ratios to assess the health of a business.  Sone of the key ratios used by managers includes the following:

• Current Ratio.
• Quick Ratio.
• Operating profit margin.
• Net profit margin.
• Debt to equity ratio.
• Inventory Turnover.
• Return on equity.
• Earnings per Share.
• Return on assets.

As we’ll see through this guide the choice of a financial ratio is also in accordance with the industry and business models we’re analyzing.

Types of financial ratios

Financial ratios are great “financial heuristics” to have a quick glance at business performance.

Those financial ratios, in particular, help us assess five things:

• Profitability.
• Efficiency.

Each of those aspects it’s essential for a business’s sustainable short and long-term growth .

What is liquidity?

Liquidity is the capacity of a business to find the resources needed to meet its obligations in the short term. 

For such reason, the liquidity on the Balance Sheet is measured by the presence of Current Assets in excess of Current Liabilities or the relationship between current assets and current liabilities.

Why do we need to assess the liquidity of a business?

For several reasons; Imagine, you are establishing contact with a new supplier.

There is no precedent history between you two.

The supplier wants some sort of guarantee that you will be able to meet future obligations. 

Therefore, he asks for a credit report about your organization.

This report shows whether an organization has enough liquidity to sustain its operations in the short term. 

Based on the main liquidity ratios of your organization a rating will be assigned.

The rating is a grade the organization gets if it meets specific criteria. 

Based on that rating the supplier will decide whether to entertain business with you or not.

Of course, the Rating itself is more qualitative and quantitative. 

In other words, the numbers provided by the liquidity ratios will be intersected with other metrics (such as profitability ratios and leverage ratios). 

Another example, imagine you want to open an overdraft account with a local bank.

The same scenario applies since the local bank will assess your credit score before approving the overdraft.

Thereby, the bank will look at your BS and see how liquid the organization is.

What are the main liquidity ratios?

Current Ratio

This ratio shows the relationship between the company’s current assets over its current liabilities. It measures the short-term capability of a business to repay for its obligations:

Current Assets /  Current Liabilities

Example: Imagine, your organization, in Year Two has total current assets of $100K and total current liabilities of $75K. Therefore: 100/75= 1.33 times.

Your Current Ratio is 1.33.

Is it good or bad? Well, it depends.

You have to compare this data with the previous year’s ratio.

Also, it depends on the kind of industry you are operating within.

Of course, a clothing store or specialty food store will have a much higher current ratio. 

Thereby the current assets will be 4 or 5 times the current liabilities, mainly due to large inventories.

Other companies, such as the ones operating in the retail industry can have current ratios lower than 1, due to favorable credit conditions from their suppliers. 

This allows them to operate with a low level of inventories.

For example, companies such as Burger King will have a ratio as high as 1.5, while companies such as Wal-Mart as low as 0.3.

Quick Ratio (Acid or Liquid Test)

On the Balance Sheet (BS) the items are listed from the most liquid ( cash ) to the least liquid (inventories and prepaid expenses).

The first section of the BS shows the current assets subsection (part of the Assets section). 

Current Assets are those converted into cash within one accounting cycle.

Therefore, while the current ratio tells us if an organization has enough resources to pay for its obligations within one year or so, the Quick ratio or acid test is a more effective way to measure liquidity in the very short term. Indeed, the quick ratio formula is:

Liquid Assets /  Current Liabilities

How do we define liquid assets? Liquid assets are defined as Current Assets – (Inventory + Pre-paid expenses) . Although inventory and pre-paid expenses are current assets, they are not always turned into cash as quickly as anyone would think.

Example: Imagine that of $100K of current assets.

Of which $80K are liquid assets, the remaining portion is inventory . The liability stays at $75k. 

The quick ratio will be 1.06 times or $80K/$75K. Therefore, the liabilities can be met in the very short term through the company’s liquid assets.

To assess if there was an improvement in the creditworthiness of the business we have to compare this data with the previous year. 

Although, a quick ratio of over 1, can generally be accepted, below one is usually seen as undesirable since you will not be able to pay very short-term obligations unless part of the inventories is sold and converted into cash.

Absolute Ratio

This is the third current ratio, less commonly used compared to the current and quick ratio.

If the quick ratio is more stringent in comparison to the current ratio, the absolute ratio is the strictest of the three. This is given by:

Absolute Assets /  Current Liabilities

Liquid assets – Accounts receivable = Absolute Assets. Generally, cash on hand and marketable securities are part of the absolute assets. The purpose of the absolute ratio is to determine the liquidity of the business in the very short term (a few days).

Using one current ratio or the other is really up to you, and it depends on the kind of analysis performed.

Of course, if you want to know if an organization would be able to pay in the three-month time frame, then, the Quick Ratio may be a more appropriate measure of liquidity compared to the Current Ratio. 

In addition, I find more reliable the Quick Ratio compared with the other two Liquidity Ratios.

For two simple reasons, on the one hand, the Current Ratio is not stable enough to tell whether a company will be able to meet its obligations in the short-term since it comprises items such as Inventories and Prepaid Expenses which are hardly converted into cash. 

On the other hand, the Absolute Ratio takes into account just those items, (Cash, cash equivalents, and short-term investments) which are very volatile.

Indeed, I would not be surprised if you saw the Absolute Ratio swinging from one excess to the other. 

In fact, companies usually invest their cash right away in other long-term assets that will produce future benefits for the organization.

Therefore, unless you are Microsoft, which saves billions in cash reserves, I would not rely on the Absolute Ratio as well.

What is profitability?

Profitability is the ability of any business to produce “earnings.”

The Financial Statement, which tells us whether a company is making profits or not is the Income Statement (or Profit and Loss Statement).

What are the main profitability ratios?

In order to understand if a business is making profits we have to look at its Net Profit Line also called “bottom line” since we always find it as the last item shown on this statement.

The main profitability ratios used in financial accounting are:

• Gross profit margin.
• Return on capital employed (ROCE).
• Return on equity (ROE).

Gross Profit Margin

This is the relationship between Gross Profit and sales, and it is expressed in percentages:

(Gross Profit ( Revenue – CoGS ) / Sales) x 100%

Imagine, company XYZ had $100K in Gross profit and $250K in Sales, for Year Two, therefore:

(100/250) * 100% = 40%

It means that 60% of your income is used to cover the cost of goods sold.

  This ratio is critical, since for many organizations, in particular, manufacturing, most of the costs are associated with CoGS (Cost of Goods Sold). 

For example, if you have to produce an Ice cream, you have to buy raw materials to make it.

Also, someone has to “assemble” the Ice cream before it can be sold. 

Well, the raw materials and the work needed to produce the final product are considered CoGS.

In other words, those are the costs required before the Ice cream can be sold.   

Therefore, this measure can be beneficial to assess the operational profitability of the business.

In short, the Gross Profit Margin tells us whether we are properly managing our inventories as well.

Operating Profit Margin

This is a relationship between Operating Profit and Sales, and it is expressed in percentage:

(Operating Profit ( Revenue – CoGS – Op. Expense ) / Sales) x 100%

Imagine, in Year Two, the Operating profit was $25K and your revenue $250K. Therefore:

(25/250) * 100% = 10%

This measure compared to the Gross Profit Margin has a wider spectrum, and it assesses the profitability of the overall operations.

Indeed, the operating profit is considered one of the most important metrics within the P&L. 

Indeed, the Operating Profit can be influenced by managers’ choices.

Why? Managers cannot control Taxes and Interest payments (although they can reduce the leverage). 

Therefore, the Operating Profit is the measure that truly tells us how the management is administrating the business.

For such reason, it is one of the most important metrics.

Return on capital employed

This measure assesses whether the company is profitable enough, considering the capital invested in the business. 

Indeed, it tells for each dollar invested in the business, how much return is generated. Indeed, the ROCE is the relationship between Operating Profit, and Capital Employed, expressed in percentage terms. Let’s see below what is considered capital employed:

(Operating Profit /  Capital Employed ( Total Assets – Current Liabilities )) x 100%

Imagine, company XYZ operating profit for Year-Two is $100K, and the capital invested in the business (your total assets – current liabilities) is $500K. The ROCE will be 0.2 or 20% ((100/500) * 100%). 

Therefore, for every dollar invested in the business the company made 20 cents. The higher the ROCE, the better it is for its stakeholders. Consequently, an increasing ROCE over time is a good sign.

Return on Equity

This is the relationship between net income and shareholder equity or, the amount of revenue generated by the shareholder’s investment in the organization.

This is one of the most used ratios in finance. The formula for the ROE is:

              ( Net Income /  Shareholders Equity)   x 100%

Imagine the net income of Company XYZ in Year-Two was $20K and you invested $100K. Therefore the ROE is (20/100) x 100% = 20%.   Also, an increasing ROE is a good sign. 

It means that the shareholders are getting rewarded over time for their risky investments.

This leads to more future investments by other shareholders and the appreciation of the stock. 

The ROE itself is often used without caution.

In fact, the problem with this ratio lies in its denominator. Indeed, the management can control Shareholders’ Equity. 

For instance, the Net Income is produced through assets that the company bought. Assets can be acquired either through Equity (Capital) or Debt (Liability). 

Consequently, when companies decide to finance their assets through Debt, usually revenue accelerates at a higher speed compared to interest expenses.

This leads to a higher Net Income, although a lower Shareholders’ Equity. 

That, in turn, generates an artificially high Return on Equity.  

For such reason, it is important to use this ratio cautiously and in conjunction with other leverage ratios as well (such as the Debt to Equity ratio).

What is Solvency?

The solvency ratios also called leverage ratios help to assess the short and long-term capability of an organization to meet its obligations.

In fact, while the liquidity ratios help us to evaluate in the very short term the health of a business, the solvency ratios have a broader spectrum.

Be reminded that the assets can be acquired either through debt or equity.

The relationship between debt and equity tells us the capital structure of an organization.

Until debt helps the organization to grow this leads to an optimal capital structure. 

When, instead, the debt grows (and interest expenses grow exponentially) too much this can be a real problem.

Consequently, the Solvency Ratios help us to answer questions such as: Is the company using an optimal capital structure? If not, is debt or equity the problem?   

If the debt is the problem, will the company be able to repay its contracted debt through its earnings?

What are the main s olvency ratios ?

The main solvency ratios are:

• Interest Coverage Ratio.
• Debt to Assets.

Debt to equity ratio

This ratio explains how much more significant is the debt in comparison to equity.

This ratio can be expressed either as a number or a percentage.

The formula to compute the debt to equity ratio is:

Total Liabilities /  Shareholders’ Equity

The debt to equity ratio is also defined as the gearing ratio and measures the level of risk of an organization.

Indeed, too much debt generates high-interest payments that slowly erode the earnings. 

When things go right, and the market is favorable companies can afford to have a higher level of leverage.

However, when economic scenarios change such companies find themselves in financial distress. 

Indeed, as soon as the revenues slow down, they are not able to repay their scheduled interest payments.

Therefore, those companies will have to restructure their debt or face bankruptcy, as happened during the 2008 economic downturn to many businesses. 

Imagine that you own a Coffee Shop and in the second year of operations, (after many investments to buy new fancy machines) the balance sheet shows $200K in total liabilities and $50K in equity. 

This means that your debt to equity ratio is 4 or 200/50. Is it good or bad? Of course, a gearing ratio of 4 is very high.

This means that if things go wrong for a few months, you will not be able to sustain the business operations. 

Not all contracted debt is negative. Indeed, debt that allows you to pay fixed interest helps companies to find their optimal capital structure.

Instead, any increase in interest payments may result in burdening indebtedness and consequently financial distress. 

Debt to equity ratio of 4 is extremely high although we want to compare it against the previous year’s financials and the leverage of competitors as well.

If we go back to the coffee shop example, the debt to equity ratio of 4 is ok if all the other coffee shops in the neighborhood operate with the same level of risk. 

It can be that operating margins for the coffee shop are so high that they can handle the debt burden. Imagine the opposite scenario, where all the coffee shops in the area operate with a leverage of 2. 

If the price of the raw materials skyrocket, you will have to raise the cost of the coffee cup. This, in turn, will slow down the revenues.

While many coffee shops in the neighborhood will be able to handle the situation, your coffee shop with a gearing of 4 will go bankrupt after a while.

Interest Coverage Ratio

This ratio helps us to further investigate the debt burden a business carries. In the previous example, we saw how the leverage could lead to financial distress. 

The interest coverage tells us if the earnings generated are enough to cover the interest expenses. Indeed the interest coverage formula is:

EBIT /  Interest Expense

The EBIT (earnings before interest and taxes) has to be large enough to cover the interest expense. A low ratio means that the company has too much debt and earnings are not enough to pay for its interest expense. 

A high ratio means instead the company is safe. Keep in mind that being too safe can be limiting as well.

In fact, an organization that is not able to leverage on debt may miss many opportunities or become the target of larger corporations. 

Imagine that your coffee shop at the end of the year generated $10K in net income.

The Interest expense is $120K and taxes $20K. How do we compute the interest coverage ratio?

1. Take the net income, $10K, and add back the interest expense, $120K. This gives you the EBIAT or earnings before interest after tax. The EBIAT is 10 + 120 = 130.

2.   Take the EBIAT and add back the tax expense. Therefore you will get the EBIT. The EBIT is 130 + 20 = 150.

3. Take the EBIT and divide it by your interest expense. Therefore, 150: 120 = 1.25 times.

This implies that the EBIT is 1.25 times the interest expense. Therefore the company generates just enough operating earnings to cover for its interest. 

However, it is very close to the critical level of 1. Below one the company is risky. Indeed, it may be short of liquidity and close to bankruptcy anytime soon.

Debt to Assets Ratio

This ratio explains how much debt was used in acquiring the company’s assets and it is expressed either in number or percentage. The formula is:

Total liabilities /  Total Assets

Imagine your coffee shop shows on the balance sheet $200K of total liabilities and $50K of equity. How do we compute the debt to asset ratio?

1. Compute the total assets: $ 200K of liabilities + $50K of equity = $250K .

2. Compute the debt to asset ratio: $200 of liabilities / $250 of total assets = 0.8.

This means that 80% of the company’s assets have been financed through debt. A ratio lower than 0.5 or 50% indicates a fair level of risk.

A ratio higher than 0.5 or 50% can determine a higher risk to the business.

Of course, this ratio needs to be assessed against the ratio of comparable companies. 

What is efficiency?

Efficiency is the ability of a business to quickly turn its current assets into cash that can help the business grow.

In fact, the way you manage the inventory accounts receivables, and accounts payables is critical to the short-term business operations.

What are the main efficiency ratios?

They assess if an organization is efficiently using its resources.   The primary efficiency ratios are:

• Accounts Receivable Turnover or collection period.
• Accounts Payable Turnover.

These ratios are called turnover since they measure how fast current and non-current assets are turned over in cash.

Inventory Turnover

This ratio shows how the well the inventory level is managed and how many times inventory is sold during a period.

The faster an organization can turn its inventory in sales, the more efficient and effective it is. This ratio is expressed in number. The formula is:

Cost of Goods Sold /  Average Inventory Cost

Imagine that your coffee shop at the end Year Two sold $100K of coffee cups, with a $40K gross income. The inventory at the beginning of the year was $6K and at the end of the year was $8K. How do we compute our inventory turnover ratio?

1. Compute our CoGS. As you know we had $100K in sales and $40K in gross income. Therefore our CoGS will be 100 – 40 = $60K .

2. Compute our average inventory . The beginning and ending balances were respectively $10,000 and $12,000, therefore our average inventory will be: (10,000 + 12,000)/2 = $11,000.

3. Compute the inventory ratio given by COGS/Average inventory , therefore: 60,000/11,000 = 5.45 times.

This means that in one year time the inventory will be sold 5.45 times. How do we know how long it will take for the average inventory to be turned in sales?

Well, to compute the days it will take to turn the inventory in sales, compute the following formula:

                365 days/5.45 times = 67 days

Through this ratio, you know that every 67 days your inventory will be turned in sales. A high inventory ratio indicates a fast-moving inventory and a low one indicates a slow-moving inventory . 

Of course, a ratio of 5.45 is great since it means no capital is tied up to inventories and you are using the liquidity more efficiency to run the business. However, this ratio needs to be compared within the same industry.

Accounts Receivable Turnover or collection period

This ratio measures how many times the accounts receivable can be turned in cash within one year. Therefore, how many the company was able to collect the money owed by its customers.   It is expressed in number, and the formula is:

Sales or Net Credit Sales /  Average Accounts Receivable

The net credit sales are those that generate receivable from customers. Indeed, each time a customer buys goods, if the payment gets postponed at a later date, this event generates receivable on the balance sheet . 

Therefore, the transaction will be recorded as revenue on the income statement and an account receivable on the balance sheet . Imagine the coffee shop you run sold $100K of coffee bags, of which $50K in gross credit sales. Of the $50K in gross credit sales, $10K of coffee bags was returned. 

The accounts receivable previous year balance was $12,000, while this year $10,000. How do we compute the accounts receivable turnover?

1. Compute our nominator, the net credit sales . This is given by the gross credit sales minus the returned product. Therefore: 50,000 – 10,000 = $40K of net credit sales.

2 Compute the average inventory that is given by the average between previous and current year, therefore: (12,000 + 10,000)/2 = $11,000 average receivable.

3. Compute the receivable turnover given by the net credit sales over the average inventory . Therefore: 40,000/11,000 = 3.64 times.

It means that the receivables were turned into cash 3.64 times in one year.

To know how many days it took to collect the money lumped in the receivable we will use the formula below:

365/3.64 = 100

The receivables were turned into cash in 100 days. This is a good receivables level it means that you can collect money from your customers on average every 100 days. 

When the receivable level is too low, usually companies turn their attention to the collection department and make sure they make the collection period as short as possible. Indeed, this will give additional liquidity to the business.

Accounts Payable Turnover Ratio

This ratio shows how many times the suppliers were paid off within one accounting cycle. This ratio is expressed in number, and the formula is:

Credit Purchases /  Average Accounts Payable

The payable turnover ratio is the flip side of the receivable ratio. The credit purchases are those, which generate payable on the company’s balance sheet . 

Therefore, each time purchase on credit is made, this will show as CoGS on the income statement and an account payable on the balance sheet . Imagine that at the end of the year were purchased $25K of raw materials from suppliers, although, $5K was returned. 

The accounts payable was $5K on the previous year and $7K this year. How do we compute the accounts payable turnover?

1. Compute the net purchase amount given by the gross purchase amount minus the returned supplies, therefore: 25K – 5k = $20K of net purchases.

2. Compute the average payable. In year one the payable was $5K and $7K in year two. Therefore: (5K + 7K)/2 = $6K in accounts payable.

3. Compute the payable turnover given by the net purchases over the average accounts payable = 20K/6K = 3.3 Times.

The supplier during the current year was paid 3.3 times; it means that every 110 days (365/3.3) the debt with the suppliers has been paid off. Keeping a high payable turnover is crucial to conduct business. 

Indeed, suppliers will assess whether or not to entertain business with an organization based on its capability to quickly repay for its obligations.

What is valuation?

Valuation is a very tricky part of finance. Indeed, valuing a company means assessing how much that is worth. Valuing is so hard since the resources a company has been organized in a way for which it becomes challenging to determine the final value . 

In addition, we have the human capital aspect that is also very difficult to assess. For such reason, valuation can be considered more of an art than a science. We are going to list the main valuation ratios here. 

Indeed, it is essential as well to know what are the main valuation ratios also to understand whether a company is over or undervalued. In other words, valuation ratios assess the perception of the market of a certain company. 

This does not mean that “Mr. Market” is always right. Quite the opposite; for instance, if we find a company that is doing extremely well regarding profitability, liquidity, leverage, and efficiency but Mr. Market does not like it; it might be useful to understand why. 

If the reason stands behind things that Mr. Market knows and we don’t, I still would not buy it. On the other hand, if Mr. Market simply does not like that stock because it considers it “boring,” then I would give a thought about buying it.

What are the main valuation ratios?

The primary valuation ratios are:

• Earnings per Share
• Price/Earnings

Dividend Yield

Payout ratio, earnings per share.

This ratio tells us what is the return for every single share. The formula is given by:

(Net Income – Preferred Dividends) /  Weighted Average Number of Common Shares

When the ratio is increasing over time it means that the company may represent a good investment for its shareholders (although it must be weaved with other ratios before we can assess whether it is a good investment).

Price/Earnings Ratio

This ratio tells us how many times over its earnings the market is valuing the stock:

A higher Price/Earnings ratio can be useful to a certain extent. For instance, technological companies tend to have a higher P/E ratio compared to others. Although, when the P/E is too high this may be due to speculations.

This ratio tells us how much of the stock value has been paid toward dividends. In other words, how much (in percentage) shareholders are getting back from their investment in stocks:

Dividends per Share ( Dividends/Outstanding Shares ) /  Stock Price

Indeed a higher Dividend Yield is a good sign, and it means that the company is rewarding its shareholders. Also, stocks with historically high dividend yields have often been sought as good securities by stock market investors. But how do we assess whether the dividends yield is high enough?

This ratio tells us whether a company is paying enough dividends to its shareholders, and its formula is:

Dividends per Share /  Earnings per Share

The payout ratio must be assessed case by case on the one hand. On the other side, a meager payout ratio is less attractive for investors, who are looking for higher returns.

How, why and when to use financial ratios 

Many “analysts” and “investors” are deceived by the use of the valuation ratios. Those ratios help us to have an understanding of how Mr. Market values a business. 

On the other hand, we want to use valuation ratios in conjunction with liquidity, profitability, efficiency, and leverage. In other words, decide before to start your analysis beforehand what will be the ratios that will guide you throughout your analysis . 

For instance, if you are going to analyze a technological business, you will use different parameters compared to a manufacturing one. 

Indeed, in the former case it might be more appropriate to use liquidity ratios when assessing the financial situation of a tech company rather than efficiency ratios (a tech firm hopefully does not carry inventories); in the latter case, instead, it might be more appropriate to use the efficiency ratios when it comes to manufacturing companies. 

In fact, on one hand, tech companies operate in a more competitive environment, where changes happen swiftly (and therefore revenues plunge quickly). In such scenario holding a safe (financial) cushion, it is more appropriate. 

For such reason, the Quick Ratio is going to tell us a lot about the business. On the other hand, when analyzing a manufacturing company, the efficiency ratios may tell us much more about the business. 

Indeed, in such a scenario, the way inventories, receivable and payable are managed can be crucial to give enough oxygen to the business itself. 

Therefore, in conjunction with the quick ratio, the inventory turnover , accounts receivable and accounts payable turnover will give us a more precise account of the business. 

One last important point is that Ratios help us in the understanding of the past and the current situation. Although the past and the present are essential to interpret the future, they can be deceitful as well. Therefore, when analyzing any organization, it is essential to be guided by caution.   Having highlighted this point, let’s move on to dirt our hands now. 

Key Highlights

Financial Ratios and Their Significance:

• Assess short-term financial health.
• Current Ratio: Current assets vs. current liabilities.
• Quick Ratio: Immediate liquidity (excludes inventory ).
• Absolute Ratio: Very short-term liquidity (liquid assets – accounts receivable).
• Measure earnings and efficiency.
• Gross Profit Margin: Operational efficiency.
• Operating Profit Margin: Overall operational efficiency.
• Return on Capital Employed (ROCE): Efficient capital utilization.
• Return on Equity (ROE): Reward for shareholders’ equity investment.
• Indicate long-term financial stability.
• Debt-to-Equity Ratio: Debt vs. equity proportion.
• Interest Coverage Ratio: Earnings vs. interest expenses.
• Debt to Assets Ratio: Debt’s impact on asset financing.
• Evaluate resource utilization.
• Inventory Turnover: Speed of inventory sale.
• Asset Turnover: Asset efficiency.
• Gauge investment attractiveness.
• Price-to-Earnings (P/E) Ratio: Stock price vs. earnings per share.
• Price-to-Book (P/B) Ratio: Stock price vs. book value per share.
• Informed decision-making.
• Performance assessment.
• Goal setting.
• Benchmarking.
• Peer comparison.
• Neglect of qualitative factors.
• Accounting differences.
• Economic conditions.
• Facilitates better decision-making.
• Detect trends and address financial issues proactively.
• Consider both quantitative and qualitative aspects.
• Interpret ratios in industry, economic, and strategic context.
• Serve specific objectives (profitability, solvency, efficiency).
• Applicable across industries, with variations.
• High debt ratios amplify financial risk.
• Ensure short-term obligations can be met.
• Key indicator of financial health.
• Track performance trends.
• Combines quantitative and qualitative factors.
• High leverage amplifies gains and losses.
• Balanced capital structure for stability.
• Ensures earnings cover interest expenses.
• Optimize capital structure.
• Combine ratios with cash flow and statement analysis .
• Influences buy, hold, or sell decisions.
• Holistic view of financial health.
• Widely used in finance, accounting, and business.
• Monitor performance and adapt.
• Integral for achieving financial goals.

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What is a financial ratio?

A financial ratio is a metric usually given by two values taken from a company’s financial statements that compared give five main types of insights for an organization. Things such as liquidity, profitability, solvency, efficiency, and valuation are assessed via financial ratios. Those are metrics that can help internal and external management to make informed decisions about the business. 

What are the different financial ratios?

There are five main types of financial ratios: liquidity, profitability, solvency, efficiency, and valuation. Liquidity helps in assessing the short-term availability of cash or cash equivalents of an organization. While profitability helps understand how profitable a company is. Solvency whether a company has the resources to repay its short and long-term debt. Efficiency, whether the operations are run properly. And valuation helps understand the multiple a company might be worth in the marketplace.

What are the most important financial ratios?

There are several financial ratios to assess the health of a business.  Sone of the key ratios used by managers include the following: – Current Ratio – Quick Ratio – Operating profit margin – Net profit margin – Debt to equity ratio – Inventory turnover – Return on equity – Earnings per Share – Return on assets

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What Is Financial Ratio Analysis?

Overview, Definition, and Calculation of Financial Ratios

Types of Financial Ratios

• How Financial Ratio Analysis Works

Interpretation of Financial Ratio Analysis

Who uses financial ratio analysis, frequently asked questions (faqs).

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Financial ratio analysis uses the data contained in financial documents like the balance sheet and statement of cash flows to assess a business's financial strength. These financial ratios help business owners and average investors assess profitability, solvency, efficiency, coverage, market value, and more.

Key Takeaways

• Financial ratio analysis assesses the performance of the firm's financial functions of liquidity, asset management, solvency, and profitability.
• Financial ratio analysis is a powerful analytical tool that can give the business firm a complete picture of its financial performance on both a trend and an industry basis.
• The information gleaned from a firm's financial statements by ratio analysis is useful for financial managers, competitors, and average investors.
• Financial ratio analysis is only useful if data is compared to past performance or to other companies in the same industry.

Financial ratios are useful tools that help business managers, owners, and potential investors analyze and compare financial health. They are one tool that makes financial analysis possible across a firm's history, an industry, or a business sector.

Financial ratio analysis uses the data gathered from these ratios to make decisions about improving a firm's profitability, solvency, and liquidity.

There are six categories of financial ratios that business managers normally use in their analysis. Within these six categories are multiple financial ratios that help a business manager and outside investors analyze the financial health of the firm.

It's important to note that financial ratios are only meaningful in comparison to other ratios for different time periods within the firm. They can also be used for comparison to the same ratios in other industries, for other similar firms, or for the business sector.

Liquidity Ratios

The liquidity ratios answer the question of whether a business firm can meet its current debt obligations with its current assets. There are three major liquidity ratios that business managers look at:

• Working capital ratio : This ratio is also called the current ratio (current assets - current liabilities). These figures are taken off the firm's balance sheet. It measures whether the business can pay its short-term debt obligations with its current assets.
• Quick ratio: This ratio is also called the acid test ratio (current assets - inventory/current liabilities). These figures come from the balance sheet. The quick ratio measures whether the firm can meet its short-term debt obligations without selling any inventory.
• Cash ratio : This liquidity ratio (cash + cash equivalents/current liabilities) gives analysts a more conservative view of the firm's liquidity since it uses only cash and cash equivalents, such as short-term marketable securities, in the numerator. It indicates the ability of the firm to pay off all its current liabilities without liquidating any other assets.

Efficiency Ratios

Efficiency ratios, also called asset management ratios or activity ratios, are used to determine how efficiently the business firm is using its assets to generate sales and maximize profit or shareholder wealth. They measure how efficient the firm's operations are internally and in the short term. The four most commonly used efficiency ratios calculated from information from the balance sheet and income statement are:

• Inventory turnover ratio: This ratio (sales/inventory) measures how quickly inventory is sold and restocked or turned over each year. The inventory turnover ratio allows the financial manager to determine if the firm is stocking out of inventory or holding obsolete inventory.
• Days sales outstanding: Also called the average collection period (accounts receivable/average sales per day), this ratio allows financial managers to evaluate the efficiency with which the firm is collecting its outstanding credit accounts.
• Fixed assets turnover ratio: This ratio (sales/net fixed assets) focuses on the firm's plant, property, and equipment, or its fixed assets, and assesses how efficiently the firm uses those assets.
• Total assets turnover ratio: The total assets turnover ratio (sales/total assets) rolls the evidence of the firm's efficient use of its asset base into one ratio. It allows analysts to gauge how efficiently the asset base is generating sales and profitability.

Solvency Ratios

A business firm's solvency, or debt management, ratios allow the analyst to appraise the position of the business firm's debt financing or financial leverage that they use to finance their operations. The solvency ratios gauge how much debt financing the firm uses as compared to either its retained earnings or equity financing. There are two major solvency ratios:

• Total debt ratio : The total debt ratio (total liabilities/total assets) measures the percentage of funds for the firm's operations obtained by a combination of current liabilities plus its long-term debt.
• Debt-to-equity ratio : This ratio (total liabilities/total assets - total liabilities) is most important if the business is publicly traded. The information from this ratio is essentially the same as from the total debt ratio, but it presents the information in a form that investors can more readily utilize when analyzing the business.

Coverage Ratios

The coverage ratios measure the extent to which a business firm can cover its debt obligations and meet the associated costs. Those obligations include interest expenses, lease payments, and, sometimes, dividend payments. These ratios work with the solvency ratios to give a financial manager a full picture of the firm's debt position. Here are the two major coverage ratios:

• Times interest earned ratio: This ratio (earnings before interest and taxes (EBIT)/interest expense) measures how well a business can service its total debt or cover its interest payments on debt.
• Debt service coverage ratio: The DSCR (net operating income/total debt service charges) is a valuable summary ratio that allows the firm to get an idea of how well the firm can cover all of its debt service obligations.

Profitability Ratios

Profitability ratios are the summary ratios for the business firm. When profitability ratios are calculated, they sum up the effects of liquidity management, asset management, and debt management on the firm. The four most common and important profitability ratios are:

• Net profit margin: This ratio (net income/sales) shows the profit per dollar of sales for the business firm.
• Return on total assets (ROA): The ROA ratio (net income/sales) indicates how efficiently every dollar of total assets generates profit.
• Basic earning power (BEP): BEP (EBIT/total assets) is similar to the ROA ratio because it measures the efficiency of assets in generating sales. However, the BEP ratio makes the measurement free of the influence of taxes and debt.
• Return on equity (ROE): This ratio (net income/common equity) indicates how much money shareholders make on their investment in the business firm. The ROE ratio is most important for publicly traded firms.

Market Value Ratios

Market Value Ratios are usually calculated for publicly held firms and are not widely used for very small businesses. Some small businesses are, however, traded publicly. There are three primary market value ratios:

• Earnings per share (EPS): As the name implies, this measurement conveys the business's earnings on a per-share basis. It is calculated by dividing the net income by the outstanding shares of common stock.
• Price/earnings ratio (P/E): The P/E ratio (stock price per share/earnings per share) shows how much investors are willing to pay for the stock of the business firm per dollar of profits.
• Price/cash flow ratio: A business firm's value is dependent on its free cash flows. The price/cash flow ratio (stock price/cash flow per share) assesses how well the business generates cash flow.
• Market/book ratio: This ratio (stock price/book value per share) gives the analyst another indicator of how investors view the value of the business firm.
• Dividend yield: The dividend yield divides a company's annual dividend payments by its stock price to help investors estimate their passive income. Dividends are typically paid quarterly, and each payment can be annualized to update the dividend yield throughout the year.
• Dividend payout ratio: The dividend payout ratio is similar to the dividend yield, but it's relative to the company's earnings rather than the stock price. To calculate this ratio, divide the dollar amount of dividends paid to investors by the company's net income.

How Does Financial Ratio Analysis Work?

Financial ratio analysis is used to extract information from the firm's financial statements that can't be evaluated simply from examining those statements. Ratios are generally calculated for either a quarter or a year.

To calculate financial ratios, an analyst gathers the firm's balance sheet, income statement, and statement of cash flows, along with stock price information if the firm is publicly traded. Usually, this information is downloaded to a spreadsheet program.

Small businesses can set up their spreadsheet to automatically calculate each of these financial ratios.

One ratio calculation doesn't offer much information on its own. Financial ratios are only valuable if there is a basis of comparison for them. Each ratio should be compared to past periods of data for the business. The ratios can also be compared to data from other companies in the industry.

It is only after comparing the financial ratios to other time periods and to the companies' ratios in the industry that an analyst can draw conclusions about the firm performance.

For example, if a firm's debt-to-asset ratio for one time period is 50%, that doesn't tell a useful story unless it's compared to previous periods, especially if the debt-to-asset ratio was much lower or higher historically. In this scenario, the debt-to-asset ratio shows that 50% of the firm's assets are financed by debt. The financial manager or an investor wouldn't know if that is good or bad unless they compare it to the same ratio from previous company history or to the firm's competitors.

Performing an accurate financial ratio analysis and comparison helps companies gain insight into their financial position so that they can make necessary financial adjustments to enhance their financial performance.

There are other financial analysis techniques that owners and potential investors can combine with financial ratios to add to the insights gained. These include analyses such as common size analysis and a more in-depth analysis of the statement of cash flows.

Several stakeholders might need to use financial ratio analysis:

• Financial managers : Financial managers must have the information that financial ratio analysis imparts about the performance of the various financial functions of the business firm. Ratio analysis is a valuable and powerful financial analysis tool.
• Competitors : Other business firms find the information about the other firms in their industry important for their own competitive strategy.
• Investors : Current and potential investors (whether publicly traded or financed by venture capital) need the financial information gleaned from ratio analysis to determine whether or not they want to invest in the business.

What are 5 key financial ratios?

Five of the most important financial ratios for new investors include the price-to-earnings ratio, the current ratio, return on equity, the inventory turnover ratio, and the operating margin.

Why is financial ratio analysis important?

Financial ratio analysis quickly gives you insight into a company's financial health. Rather than having to look at raw revenue and expense data, owners and potential investors can simply look up financial ratios that summarize the information they want to learn.

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Wells Fargo. " 5 Ways To Improve Your Liquidity Ratio ."

Morningstar. " Efficiency Ratios ."

OpenStax. " Principles of Finance: 6.4 Solvency Ratios ."

YCharts. " Times Interest Earned ."

Austin Water. " Financial Policies Update Frequently Asked Questions (FAQ) ."

Edward Lowe Foundation. " How To Analyze Profitability ."

Pamela P. Peterson, Pamela Peterson Drake, Frank J. Fabozzi, " Analysis of Financial Statements ," Pages 76-77. Wiley, 1999.

Nasdaq. " Return on Equity (ROE) ."

OpenStax. " Principles of Finance: 6.5 Market Value Ratios ."

OpenStax. " Principles of Finance: 11.1 Multiple Approaches to Stock Valuation ."

Rodney Hobson. " The Dividend Investor ." Harriman House, 2012.

Corporate Finance Institute. " Financial Ratios ."

Edward Lowe Foundation. " How To Analyze Your Business Using Financial Ratios ."

Business Research

• Company Information
• Annual Reports
• Competitors
• Financial Information
• Financial Ratios
• Investment Reports
• Mission Statement
• Leadership Information
• Finding or Creating SWOT Analyses
• Using Hoovers to Create Lists
• Industry Overviews
• Trends and Projections

Finding Financial Ratios for Industries

Abi/inform collection, gale business: insights, additional resources.

• Major Companies
• Market Research
• Marketing Plans
• Market Share
• Market Size
• Demographics/Psychographics
• Product Reviews
• Products/Brands
• Business Plans
• Case Studies
• Country Information
• NAICS Codes

Financial ratios show the mathematical relationship between two numbers related to an industry's performance. Once a ratio has been calculated according to the relevant formula, the ratio can be used to help determine how well a particular industry is doing.

Here's how to find industry ratios in various UMGC Library databases:

Login to ABI/INFORM Collection .

Enter an industry’s name in a search box on the database’s home page. Then scroll down the page and, in the Document type: section, check the box next to “Industry Report.”

You may need to re-sort your search results by publication so that the most recent industry reports appear at the top of the list.

Industry reports may include financial ratios.

Login to Gale Business: Insights .

Scroll down the page, click on the  Browse All Industries  button, enter an industry’s name or its six-digit  NAICS code  in the search box, and then click on the industry's name on the search results page..

The Plunkett reports available from the "Industry Reports" section contain industry ratios.

Login to Hoovers . 

Enter an industry's name, SIC code, or NAICS code in the search box on the database's home page and use the drop-down menu next to the search box to select  Industries .

Click on the industry link on the search results page.

On the industry information page, below the "Market Research" heading on the left-hand side of the page, click on the  All Market Research Reports  link and scroll through the list of available reports to select relevant report(s), such as RMA Industry Norms reports.

Another option for finding industry ratios in Hoovers is to enter the name of a company in the industry of interest in the "Search for a company" box at the top of the database's home page. (So, for example, if you were interested in the footwear manufacturing industry, you could use Hoovers to look up Nike or Skechers, etc.)

On the left-hand side of the company information page, click on the Ratio Comparisons link in the "Financials" section. You’ll then see financial ratios for the company that you searched for, as well as for the industry and sector that the company is a part of.

Login to IBISWorld

Enter an industry's name or NAICS code in the search box. (Note that IBISWorld uses 5-digit NAICS codes.)

Click on the link for a relevant industry report from the search results.

On the industry report page, click on the  Financial Benchmarks  link from the menu on the left-hand side of the page and then on the links for  Financial Ratios  and for  Key Ratios .

Login to Nexis Uni .

Click on the Find a Company  link on the database's home page, below the search box.

On the Find a Company page, enter the name of a company in the industry of interest in the "Company name" search box and click on the company's name on the results page.  (For example, if you're interested in the airline industry, you could search for Southwest Airlines.)

On the company dossier page, click on  Industry Knowledge  from the menu on the left-hand side of the page and then click on the link for  Industry Overview .

On the industry overview page, click on the link for  Ratio Components  to see financial ratios for the top companies in the industry.

The UMGC Library contains many resources that can be used to find  more information about what financial ratios are, how they're calculated, what they can be used for, etc. A sampling of these resources is given below:

• This encyclopedia entry (from the Encyclopedia of small business ) provides information about four categories of ratios: profitability/return on investment, liquidity, leverage, and efficiency.
• This encyclopedia entry (from the Encyclopedia of management ) provides information about many types of financial ratios: profitability, asset utilization, leverage, liquidity, market value, and common size. It also provides cautionary information about the use and interpretation of financial ratios.
• Per the preface for this ebook, "There are nearly 250 measurements itemized in this book. Each one is accompanied by a complete description, an explanation of the calculation, an example, and cautions regarding its use."
• ​​​​​​​ This ebook presents 10 ratios for financial statement analysis, in addition to numerous other accounting-related topics
• ​​​​​​​ Per the description for this ebook, the book's "authors demonstrate the nuts and bolts of financial analysis by applying the techniques to actual companies"
• << Previous: Trends and Projections
• Next: Major Companies >>
• Last Updated: Aug 14, 2024 4:36 PM
• URL: https://libguides.umgc.edu/business-research

Financial Ratios: A Guide to Library Resources

Finding general industry ratios or industry norms.

The most useful general ratios are:

• Key Business Ratios Key Business Ratios, from Dun and Bradstreet, help you to assess how a business is doing compared to an industry or a competitor. The 14 key business ratios cover the critical areas of business performance --solvency, efficiency and profitability. They are broken down into median figures, with upper and lower quartiles. Ratios are arranged by Standard Industrial Classification (SIC) Codes -a four-digit number that classifies business establishments by defining the industries in which they do business. See the next entry for the print version of these ratios. You can choose whether you want general or more specific (solvency, efficiency, profitability) ratios, and you can search by line of business or SIC code. Need definitions of the financial ratios, or information on how they are calculated? Use the Key Business Ratios help pages.
• Bizminer BizMiner offers industry financial analysis benchmarks for over 5,000 lines of business and industry market trends on thousands more. Their market analysis reports are available at the national and local levels down to the zip code. Bizminer is a great resource to use when developing business plans, or for any sort of entrepreneurship initiatives where you need to measure peer performance in an industry.

ALMANAC OF BUSINESS AND INDUSTRIAL FINANCIAL RATIOS.

The source of data is tax returns filed with the U. S. Internal Revenue Service. The most recent edition provides data on millions of U.S. corporations. It provides 50 performance indicators for each industry, and at the end of each industry section, performance indicators for the last 10 years are shown. Data are grouped into 13 categories by size of assets in each industry. About 180 lines of business are covered.

The Almanac provides norms in actual dollar amounts for revenue and capital factors such as net receivables, inventories, total assets, and it gives you important average operating costs in percent of net sales for: cost of operations, pensions and benefits, compensation of officers, wages and salaries, taxes and more. We have been receiving the annual editions of the Almanac since 1973.

INDUSTRY NORMS AND KEY BUSINESS RATIOS.

This five volume set contains the most comprehensive industry coverage (including over 800 lines of business). The volumes in the set are: 1) Agriculture, Mining, Construction, Transportation, Communication, Utilities; 2) Manufacturing; 3) Wholesaling; 4) Retailing; 5) Finance, Insurance, Real Estate, Services.

Ratios are arranged by SIC number, and sub-divided into four geographic areas of the U. S. (at the 2-digit level) and into three to five asset size ranges (at the four digit level).

For each SIC number covered, the following data is provided: 1) fourteen key business ratios that can be used to analyze solvency, efficiency and profitability, 2) typical balance sheets and income statements for the industry (in dollars), and 3) common-size financial figures (each item of the financial statement as a percentage of its respective aggregate total). The source of data is the Dun & Bradstreet Financial Database. We have been receiving the annual volumes in this set in the Library since 1979.

IRS CORPORATE FINANCIAL RATIOS.

These industry ratios are based on the most recently available income statement and balance sheet data compiled by the Internal Revenue Service of the United States Department of the Treasury. There are 79 ratios or averages given for each industry. We have been receiving this annual publication in the Library regularly since 1991.

RMA ANNUAL STATEMENT STUDIES.

This publication is a product of the commercial banking community and RMA (now Risk Management Association, formerly Robert Morris Associates), the association of lending and credit risk professionals. Over 500 lines of business are covered. Current and comparative historical data are included. Financial statements on each industry are shown in common size form. Sixteen widely used business ratios follow the financial statements.

Each RMA Annual Statement Studies volume has a section at the front of the volume that gives good definitions of each of the ratios and shows how each was computed. Each volume also has a section at the back called *Sources of Composite Financial Data--A Bibliography* that identifies other major sources of composite financial data for industries. We have been receiving the RMA annual volumes in the Library since 1927.

Other General Ratios

Cost of Capital Provides industry financial information relating to revenues, profitability, equity returns, ratios, capital structure, cost of equity and weighted average cost of capital. Arranged by SIC code. Provides data on over 300 U S based industries. The main provider of data for Cost of Capital is the Standard & Poors Compustat Data.  • Location(s): TC Wilson Library Business Reference Quarto HC110.C3 C67 Non-Circulating  •  Check MNCAT Record for Location and Availability

• NetAdvantage by S&P Global Overviews, rankings and comparative statistics for major industries that provides detailed information on public companies such as stock reports, bonds, stock valuation annual reports, and other detailed fianancial statistics. NetAdvantage also includes investment services such as the advisory newsletter Outlook and screening directories for stocks, bonds and mutual funds. There are also directories for private companies and the Register of Corporations, Directors, and Executives . Subscription cancelled effective November 27, 2018 .
• IBIS World (Business) Search industry reports for the United States, Canada, China, and global topics. Each report provides an overall current picture of an industry, including overviews, leading companies, sales information, and authoritative sources for researching hundreds of industries. Includes Business Environmental Profiles that summarize key drivers for industries in the U.S.

Do It Yourself! Produce Your Own Ratios

• Mergent Online (Business) Profiles of public corporations around the world that includes summaries, company histories, property, financials, subsdiaries, joint ventures, long term, press release and historical annual reports.

CompactD SEC CompactD SEC provides reports on publicly held companies. Company profiles include descriptions, address, state of incorporation, stock exchange, ticker symbol, primary and secondary SIC codes, number of shareholders, number of shares outstanding, number of employees, etc. The bulk of each report is comprised of financial information taken from the quarterly and annual financial statements including key ratios, and summary stock price, ownership and dividend figures with previous 5 year comparison data. Data is compiled from SEC filings. Because the same format is used on all the disks, you can use them to get a series of statistical data on corporations in the U.S. from the 1980s through 2003. CDROM is only available on Business Reference workstations.  • Location(s): Please email [email protected] for access details

Definitions of Ratios: What does it all mean?

Do you need to know how the ratios are computed or what they can be used to evaluate? Information on how the ratios are constructed and what they can be used to measure are included in the following sources:

Good definitions of ratios appear at the front of each volume of the  RMA STATEMENT STUDIES  in the *Definition of Ratios* section [WILS REF Quarto HF5681 .B R6] and at the front of the  IRS CORPORATE FINANCIAL RATIOS  [WILS REF Quarto HF5681 .R25 I27x].

Other books on ratio analysis and financial statement analysis include:

• Kwok, Benny K. B.  Accounting irregularities in financial statements : a definitive guide for litigators, auditors, and fraud investigators  / Benny K.B. Kwok. Aldershot, Hants, England ; Burlington, VT : Gower, c2005. TC Wilson Library HF5686.C7 K85 2005 [Table of contents ]--  http://www.loc.gov/catdir/toc/ecip058/2005005509.html 

Ratio analysis for decision making, a study

• February 2023
• Brazilian Journal of Science 2(5):29-41

• Sidho Kanho Birsha University

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Fuzzy–rough analysis of esg ratings and financial and growth ratios on the stock returns of blue-chip stocks in taiwan.

1. Introduction

2. literature review, 2.1. esg and stock returns, 2.2. financial ratios and stock returns, 2.3. rst-based financial modeling, 3. rst-based bipolar model, 4. a case study from taiwan, 5. discussion, 6. concluding remarks, data availability statement, conflicts of interest.

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Share and Cite

Shen, K.-Y. Fuzzy–Rough Analysis of ESG Ratings and Financial and Growth Ratios on the Stock Returns of Blue-Chip Stocks in Taiwan. Mathematics 2024 , 12 , 2511. https://doi.org/10.3390/math12162511

Shen K-Y. Fuzzy–Rough Analysis of ESG Ratings and Financial and Growth Ratios on the Stock Returns of Blue-Chip Stocks in Taiwan. Mathematics . 2024; 12(16):2511. https://doi.org/10.3390/math12162511

Shen, Kao-Yi. 2024. "Fuzzy–Rough Analysis of ESG Ratings and Financial and Growth Ratios on the Stock Returns of Blue-Chip Stocks in Taiwan" Mathematics 12, no. 16: 2511. https://doi.org/10.3390/math12162511

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Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

Investors have access to real-time fundamental and technical analysis data on which they can base informed investment decisions, thanks to the Internet. In addition to a wealth of information that includes price quotes and historical charts, many financial websites also have communication tools such as RSS feeds, X (formerly Twitter) and Facebook updates, and newsletters to keep investors on top of dynamic market conditions.

Key Takeaways

• The top website for one company's financials might not be the same for another company.
• It's best to consult multiple websites so you can compare and double-check data.
• Google, Yahoo!, and Bloomberg are the most commonly visited financial data sites, but lesser utilized sites such as XE, Kitco, and the SEC offer a wealth of data as well.

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Kitco brings real-time market information like price quotes, trends, market commentary, and exchange rates to investors and traders via www.kitco.com . Investors can quickly find real-time price quotes for precious metals, the top five performing gold equities, and exchange rates on the website's home page.

Investors can find live, historical, and technical charts for precious metals under the "Charts & Data" tab on the home page. Kitco has an online precious metals store called Kitco Metals Inc. in addition to news and usable market data.

A retailer of precious metals including gold, silver, platinum, palladium, and rhodium, Kitco is also a leading supplier of refining services, labware for mineral analysis, and precision-crafted devices for manufacturing processes.

SEC: Reports and Financial Statements

The U.S. Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) database provides free public access to corporate information including registration statements, prospectuses, and periodic reports filed on Forms 10-K (audited annual financial statements) and 10-Q (unaudited quarterly financial statements).

Investors can also find information regarding recent corporate events, including preliminary earnings announcements that have been reported on Form 8-K. Users can access the EDGAR database at www.sec.gov/edgar to search by companies and filings, by all SEC-registered companies in a particular state or country, or with a specific Standard Industrial Classification (SIC) code. Current and historical EDGAR archives can be researched.

Yahoo! Finance: Real-Time Quotes and Historical Charts

Investors can find free real-time quotes, current news, and international market data at www.finance.yahoo.com . Yahoo! Finance's home page shows U.S., European, and Asian market summaries. It also shows currency rates and has a currency converter. The site lists the day's top stories, and investors have access to real-time price quotes using the search option on the home page.

Investors can select from a variety of historical price charts ranging from one day to several decades, with the option to include splits, dividends, and a modest assortment of popular technical indicators. Investors can also compare historical data for two or more stocks by using the "Compare" feature.

Price charts using relative percentages illustrate the historical performance of the selected instruments.

XE: Foreign Exchange

XE's focus is on currency services. Investors and traders can find real-time currency quotes, currency news and analysis, currency converters, and a variety of currency calculators at www.xe.com . Users can subscribe to free daily email updates with currency rates, news headlines, and central bank interest rates.

XE posts updates on Facebook, and users can also download XE Currency apps for iPad, BlackBerry, iPhone, Android, and Windows phones.

What Are the Most Important Types of Financial Statements?

Three financial statements can be key to making investment decisions: the cash flow statement, the balance sheet, and the income statement. The SEC offers various financial statements that can guide you, but you might not find these three readily available for all companies you're thinking of investing in or all of them for the same company. Canvas different sites to dig up pertinent information.

How Do I Analyze Financial Data If I'm a First-time Investor?

Begin by gathering pertinent information and companies' financial data. Sort it, categorize it, and study it so you have a fundamental understanding of what's involved. Then consider enlisting the help of a professional if this is the first time you're parting with your hard-earned dollars. Your research will help you better understand the professional's guidance.

You don't have to hook up with the advisor forever. You can branch out on your own as you gain more experience and confidence.

What's the Best Website for Gathering a Company's Financial Statistics?

The best site depends on what you're looking for. Each can provide different information, although some key data might be repeated across sites. You might look to XE for foreign data and to the SEC for U.S. information. Again, a professional can guide you and make recommendations based on your experience level and interests.

Financial stats provide critical information to investors and shareholders, and the Internet makes them much easier to access. The best site for you will depend on the kind of information you're looking for and the nature of the business you want to investigate. Google, Yahoo!, and Bloomberg are the most commonly known websites, and they're reliable. But you'll still want to compare data between sites to make sure you're accessing the most accurate and up-to-date stats .

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