Financial ratios are fundamental tools for evaluating a company's performance and financial health. These indicators allow investors, lenders, and managers to make informed decisions based on objective data.
What are financial ratios?
Financial ratios are mathematical relationships between two or more items from a company's financial statements. They allow comparing a company's performance with itself over time, with other companies in the same sector, and against industry standards.
Key financial ratios
### Liquidity ratios
Measure the company's ability to meet short-term obligations.
Current ratio = Current Assets / Current Liabilities
A value greater than 1 indicates the company can cover its short-term debts. The ideal range is 1.5 to 2.0.
Quick ratio = (Current Assets - Inventory) / Current Liabilities
Similar to the current ratio but excludes inventory, offering a more conservative view of liquidity.
### Profitability ratios
Evaluate the company's ability to generate profits.
Net profit margin = Net Income / Net Sales × 100
Indicates what percentage of each dollar sold becomes profit.
ROE (Return on Equity) = Net Income / Shareholders' Equity × 100
Measures the return shareholders earn on their investment.
ROA (Return on Assets) = Net Income / Total Assets × 100
Evaluates how efficiently the company uses its assets to generate profits.
### Leverage ratios
Measure the company's financial leverage level.
Debt ratio = Total Liabilities / Total Assets
A value above 0.6 may indicate risky debt levels.
Interest coverage = Operating Income / Interest Expenses
Indicates how many times the company can cover interest payments with operating earnings. A value below 1.5 is concerning.
### Activity ratios
Measure the company's operational efficiency.
Accounts receivable turnover = Credit Sales / Average Accounts Receivable
Indicates how many times per year the company collects its outstanding accounts.
Days Sales Outstanding (DSO) = 365 / Accounts Receivable Turnover
The average number of days the company takes to collect. A high DSO may indicate liquidity problems.
Inventory turnover = Cost of Goods Sold / Average Inventory
Measures how quickly the company converts inventory into sales.
Interpretation and context
Financial ratios should be interpreted in context:
CRiskCo's analysis
CRiskCo automatically calculates key financial ratios using verified SAT data. Our FinScore incorporates these indicators alongside 50+ additional variables to generate a comprehensive credit evaluation. This enables financial institutions to make decisions based on real data, not self-reported information. For a deeper dive, see our credit metrics dictionary and our guide on non-performing loans.
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