Financial ratios are powerful tools to help summarize financial statements and the health of a company or enterprise. Learn the most useful financial ratios here.
Frequently Asked Questions
  • Why are financial ratios critical in financial analysis?

    Financial ratios are useful tools for investors to better analyze financial results and trends over time. These ratios can also be used to provide key indicators of organizational performance, making it possible to identify which companies are outperforming their peers. Managers can also use financial ratios to pinpoint strengths and weaknesses of their businesses in order to devise effective strategies and initiatives.

  • What are the main uses of financial ratios?

    Financial ratios are widely used in financial analysis to determine how companies are performing internally and/or relative to one another. These ratios generally fall within one of four types of measurements: profitability, liquidity, solvency, and valuation. Understanding and applying ratios from all of these categories can enable investors to make smarter stock purchases and potentially avoid hefty losses.

  • What financial ratio measures risk?

    Several financial ratios can be used to measure a company’s risk level, particularly in relationship to servicing debts and other obligations. These financial ratios include the debt-to-capital ratio, the debt-to-equity (D/E) ratio, the interest coverage ratio, and the degree of combined leverage (DCL). Analyzing risk is useful for both bankers deciding whether to grant loans as well as private equity investors picking companies to invest in.

  • What is solvency vs. liquidity?

    Solvency and liquidity are both terms that are related to a business’ financial health. Solvent companies are those that own more in assets than they owe in debt, which means they have a greater capacity to meet long-term financial commitments. Companies that are adequately liquid can meet their short-term financial commitments and are able to sell assets to swiftly raise cash if need be. Healthy companies are those that are both solvent and possess adequate liquidity.

Key Terms

Explore Financial Ratios

Assets & liabilities
What Is the Formula for Calculating the Current Ratio?
Business Woman Thinking Account
What Is the Acid-Test Ratio?
Couple calculating something
Asset Turnover Ratio: Formula and Examples
Woman working on documents
Understanding the Cash Ratio
Investing
What Is the Current Ratio?
Debt-to-Equity (D/E) Ratio
Balancing the ledger
How to Best Use the Debt-To-Capital Ratio
What Is a Debt Ratio?
What Is an Equity Multiplier?
Fixed Asset Turnover Ratio
Why Gross Profit Margin Matters
Midsection of Businessman Using Calculator and Laptop at Desk
What Are Liquidity Ratios?
Businessperson makes calculations on a white board
Price-to-Sales (P/S) Ratio
What the Price-to-Book (P/B) Ratio Tells You?
The Importance of Profitability Ratios
What Is the Quick Ratio?
Ratio Analysis
Understanding Return on Equity (ROE)
Return on Assets (ROA)
businessperson analyzing business charts on a clipboard
What Is a Solvency Ratio?
Understanding Total-Debt-to-Total-Assets
Understanding the CAPE Ratio
Business People Discussing In Office
Compound Annual Growth Rate (CAGR)
Book Value vs. Market Value: What's the Difference?
What's the Difference Between ROI and IRR?
Google's stock price appears on the NASDAQ Marketsite
What's Considered a Good PEG Ratio?
Business finance
EBIT vs. EBITDA: What's the Difference?
What Is Considered a Good Expense Ratio?
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What Is the Formula for Calculating Free Cash Flow (FCF)?
How Do I Calculate the Degree of Operating Leverage?
Earnings Per Share (EPS) vs. Diluted EPS: What’s the Difference?
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How Do the Current Ratio and Quick Ratio Differ?
How Do You Calculate Shareholders' Equity?
What Is the Formula for Calculating Earnings per Share (EPS)?
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How to Calculate the Inventory Turnover Ratio
Cropped section of businessperson's hands using a tablet showing financial data
How to Calculate Return on Equity (ROE)
The Difference Between Levered and Unlevered Free Cash Flow
Value
Understand the Weaknesses of the Price-to-Book (P/B) Ratio
Average Annual Growth Rate (AAGR)
Accounting
Understanding the Book-to-Market Ratio
Stocks and shares
Book Value Per Share (BVPS)
Share price data from investors portfolio on a laptop computer screen
Capital Asset Pricing Model (CAPM)
What Is Capital Expenditure (CapEx)?
Understanding the Degree of Operating Leverage
What Is a Dividend Payout Ratio?
Bank vault
Debt-Service Coverage Ratio (DSCR)
How to Use the DuPont Analysis to Assess a Company's ROE
Earnings Per Share (EPS)
Understanding Enterprise Value (EV)
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The Ins and Outs of Expense Ratios
Why Goodwill Is Unlike All the Other Intangible Assets
Business Money growth Working on Project About Business Growth
Gross Margin Definition
Woman's Hands Counts on the Calculator
Why the Interest Coverage Ratio Matters
Inventory Turnover: Formula and Calculation
Internal Rate of Return (IRR)
Man Hand With Digital Tablet Analyzing Stock Market Growth
Leverage Ratio
Leverage
Profit
What Is Net Profit Margin?
Net Present Value (NPV)
Industrial manufacture indoors.
What Is Operating Leverage?
Page Sources
  1. Demonstrating Value. "Financial Ratio Analysis." URL: https://www.demonstratingvalue.org/resources/financial-ratio-analysis