Financial Ratios

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

Woman working on documents
Understanding the Cash Ratio
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Current Ratio Explained With Formula and Examples
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Debt-to-Equity (D/E) Ratio Formula and How To Interpret It
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How to Best Use the Debt-To-Capital Ratio
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What Is a Debt Ratio?
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What Is an Equity Multiplier?
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Fixed Asset Turnover Ratio
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Why Gross Profit Margin Matters
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What Are Liquidity Ratios?
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Price-to-Sales (P/S) Ratio
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Price-to-Book (P/B) Ratio
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Profitability Ratios
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What Is Quick Ratio?
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Ratio Analysis
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Return on Equity (ROE) Calculation and What It Means
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Return on Assets (ROA) Definition
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What Is a Solvency Ratio?
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Understanding Total-Debt-to-Total-Assets
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Understanding the CAPE Ratio
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Compound Annual Growth Rate (CAGR) Formula and Calculation
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Book Value vs. Market Value: What's the Difference?
What's the Difference Between ROI and IRR?
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What's Considered a Good PEG Ratio?
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EBIT vs. EBITDA: What's the Difference?
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What Is Considered a Good Expense Ratio?
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What Is the Formula for Calculating Free Cash Flow (FCF)?
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How Do I Calculate the Degree of Operating Leverage?
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Earnings Per Share (EPS) vs. Diluted EPS: What’s the Difference?
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How Do the Current Ratio and Quick Ratio Differ?
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How Do You Calculate Shareholders' Equity?
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What Is the Formula for Calculating Earnings per Share (EPS)?
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How to Calculate Return on Equity (ROE)
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The Difference Between Levered and Unlevered Free Cash Flow
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Understand the Weaknesses of the Price-to-Book (P/B) Ratio
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Average Annual Growth Rate (AAGR)
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Understanding the Book-to-Market Ratio
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Book Value Per Share (BVPS)
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Capital Asset Pricing Model (CAPM) and Assumptions Explained
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Capital Expenditure (CapEx) Definition, Formula, and Examples
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Understanding the Degree of Operating Leverage
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What Is a Dividend Payout Ratio?
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Debt-Service Coverage Ratio (DSCR)
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What Is the DuPont Analysis?
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Earnings Per Share (EPS): What It Means and How to Calculate It
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Enterprise Value (EV) Formula and What It Means
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The Ins and Outs of Expense Ratios
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Why Goodwill Is Unlike All the Other Intangible Assets
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Gross Margin Definition
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Why the Interest Coverage Ratio Matters
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Inventory Turnover
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What Is Internal Rate of Return (IRR)?
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Leverage Ratio Definition
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Understanding Financial Leverage
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What Is Net Profit Margin?
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Net Present Value (NPV): What It Means and Steps to Calculate It
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What Is Operating Leverage?
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What Is Payout Ratio?
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Why the Price/Earnings-to-Growth Ratio Matters
Rate of Return (RoR)
Why the Receivables Turnover Ratio Matters
Page Sources
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  1. Demonstrating Value. "Financial Ratio Analysis." URL: https://www.demonstratingvalue.org/resources/financial-ratio-analysis