Most Important Financial Ratios

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Top 5 Financial Ratios

The most cost commonly and top five ratios used in the financial field include:

1. Debt-to-Equity Ratio

The debt-to-equity ratio, is a quantification of a firm’s financial leverage estimated by dividing the total liabilities by stockholders’ equity. This ratio indicates the proportion of equity and debt used by the company to finance its assets.

The formula used to compute this ratio is

Total Liabilities / Shareholders Equity

2. Current Ratio

The current ratio is a liquidity ratio which estimates the ability of a company to pay back short-term obligations. This ratio is also known as cash asset ratio, cash ratio, and liquidity ratio. A higher current ratio indicates the higher capability of a company to pay back its debts. The formula used for computing current ratio is:

Current Assets / Current Liabilities

3. Quick Ratio

The quick ratio, also referred as the “acid test ratio” or the “quick assets ratio”, this ratio is a gauge of the short term liquidity of a firm. The quick ratio is helpful in measuring a company’s short term debts with its most liquid assets.

The formula used for computing quick ratio is:

(Current Assets – Inventories)/ Current Liabilities

A higher quick ratio indicates the better position of a company.

4. Return on Equity (ROE)

The return on equity is the amount of net income returned as a percentage of shareholders equity. Moreover, the return on equity estimates the profitability of a corporation by revealing the amount of profit generated by a company with the money invested by the shareholders. Also, the return on equity ratio is expressed as a percentage and is computed as:

Net Income/Shareholder's Equity

The return on equity ratio is also referred as “return on net worth” (RONW).

5. Net Profit Margin

The net profit margin is a number which indicates the efficiency of a company at its cost control. A higher net profit margin shows more efficiency of the company at converting its revenue into actual profit. This ratio is a good way of making comparisons between companies in the same industry, for such companies are often subject to similar business conditions.

The formula for computing the Net Profit Margin is:

Net Profit / Net Sales 

We calculated average ratios based on SEC data for our readers – see industry benchmarking.

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Quote Guest, 24 August, 2013
Quote Guest, 20 November, 2013
good stuff.
Quote Guest, 4 February, 2014
thank u....!!
Quote JAGDISH KUMAR RATHI, 15 February, 2014
But Maximum, minimum or ideal number of the ratios for measuring the financial need of the company missing
Quote Shahbaz Khan, 15 March, 2014
Very helpful and a good reminder
Quote ashish, 22 March, 2014
very good.
Quote Guest, 25 March, 2014
please provide benchmark numbers for all the ratios.

Maximum limit, minimum limit, ETC.

Thank You.
Quote A Finance Major, 16 April, 2014
Benchmark numbers are not provided because they vary greatly by industry.  It may be the industry standard for one specific type of industry to carry more debt on average than another.  For example, new R&D intensive companies will carry much more debt than an insurance company that requires cash reserves to pay insurance claims.  So you can't say, "All companies should strive to have x debt-to-equity."
Quote Guest, 9 May, 2014
Quote Janusz, 10 May, 2014
Good overview. Though I honestly prefer Return on Assets (ROA) over ROE. It just seems ROE can vary a lot even within an industry - depending on how the firm is financed. That is not the case with ROA.

Just to through it out here - one ratio that I've find most useful is dividing net income with number of employees. Call it 'Return on Workforce' (ROW) or whatever, but it's a good mesure of how productive labor work turns into profit. Easy ratio to be used for evaluation purposes.
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