A financial ratio helps investors in analysis of financial health of the company and forms the basis on which investments are planned. Lets look at some of the widely used rations for analysis of various aspects related to financial health of the company.
Current Ratio tells us the current financial strength of the company, primarily in terms of the cash and credit standing of the company. It answers questions like ‘Is the company spending too much or is it holding too much cash back?
Current Ratio = Current Assets / Current Liabilities
Debt to Equity ratio tells us the amount of debt of the company against the shareholders equity
Debt to Equity ratio = Total Liabilities / Total Shareholders Equity
The ratio tells us the kind of revenue that is generated using the total assets of the company It is an indicator on performance of the assets, whether they under performing or over performing.
Asset Turnover Ratio = Sales / Average Total Assets
The ratio tells us the amount of earnings that company holds to make interest payments of its debt.
Interest Coverage ratio = Income Before Interest and Income Tax Expenses / Interest Expense
The ratio tells us how many times a business turns its inventory over a period of time. It indicates if the company has most of its assets tied up in inventory and if they are under performing.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventories
The ratio tells us the operating efficiency of the company. The percentage of profit it makes after deduction of its operating expenses.
Operating Profit Margin Ratio = Net Income – Operating Expenses / Total Sales
Investors widely use the Quick Test Ratio to arrive at the liquidity strength of the company and its overall financial standing.
Quick ratio = Quick Assets / Current Liabilities
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