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 pokhrel, 13 May, 2014
Despite of,  benchmark varies industry to industry.it would better aggregate number of industry to industry is provided.
Quote Guest, 14 May, 2014
I need to do data analysis and interpretation for fixed asset management project. so pls help me what are the ratios to be used to put data analysis???
Quote Guest, 7 January, 2015
Please add few morw ratios like asset turnover, return on sales, inventory turnover, P/E ratio, leverage ratio....etc by the nice...
Quote Vit. A., 8 January, 2015
Quote
Guest wrote:
Please add few morw ratios like asset turnover, return on sales, inventory turnover, P/E ratio, leverage ratio....etc by the nice...
All these ratios are available in our reference book here http://www.readyratios.com/reference/
Quote Guest, 28 March, 2015
very helpfull
Quote Guest, 31 March, 2015
What are the ideal ratios in each of the 5 ratios
Quote Guest, 9 February, 2016
thank you.....it was indeed helpful
Quote Guest, 26 May, 2016
How can u tell if a company has continued to make use of its debt ? which ratios would be the best to determine this ?
Quote John Mc|Knight, 4 July, 2016
The underlying assumption is that a dollar will hold its value over time. In todays volatile exchange rate markets this is a huge unknown over time measured in terms of years.
The US dollar vs euro vs Chinese currency. It is very probable that a financial crisis will result in the US dollar being worth much less than the Chinese currency within a few years....when and how this change will occur depends upon political developments........but the fundamentals are in place to make it almost inevitable.
The textbook ratios here are useful only to the extent currencies are stable over time.
Quote Guest, 5 September, 2016
This lesson is helpful for me. Thank you.
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