What are Ratios?

Understanding business ratios is key to making informed decisions and assessing the health of any company.

Ratios help turn raw financial data into actionable insights, allowing you to compare performance over time or against competitors.

1. Liquidity Ratios

• Example: Current Ratio = Current Assets ÷ Current Liabilities
• Purpose: Shows if the business can pay short-term debts. A higher ratio generally means better short-term financial health.

2. Profitability Ratios

• Example: Net Profit Margin = (Net Profit ÷ Revenue) × 100
• Purpose: Measures how well the company turns revenue into profit. It's useful for spotting efficiency and cost control.

3. Efficiency Ratios

• Example: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
• Purpose: Indicates how effectively a company uses its assets. Faster turnover often signals strong demand or efficient management.

4. Leverage Ratios

• Example: Debt-to-Equity = Total Debt ÷ Shareholders' Equity
• Purpose: Assesses financial risk. A higher ratio means more reliance on borrowed money.

How to Use Them:

• Compare ratios across multiple periods to identify trends.
• Benchmark against industry averages to spot strengths and weaknesses.
• Combine several ratios for a fuller picture of financial performance.