Financial ratios are quantitative metrics that evaluate a company’s financial position. They provide insights into the relationship between key financial variables and help stakeholders make informed decisions about a firm’s past and future performance.
The most common types of financial ratios include the following:
- Activity ratios assess how efficiently a company uses its assets to generate sales.
- Liquidity ratios evaluate a company’s overall liquidity and ability to meet short-term obligations.
- Solvency ratios assess a company’s financial stability and ability to meet long-term obligations.
- Profitability ratios assess a company’s ability to profit from its sales, assets, and equity.
- Valuation ratios evaluate a company’s net worth with respect to its earnings, book value, and other financial multiples.
DuPont Analysis is another notable framework in financial analysis that uses various multiples to assess a company’s return on equity (ROE). It breaks down the ROE measure into its components, including a firm’s earnings, investments, and working capital management.
Our open-access cheat sheets are a concise compilation of the most important formulas, conveniently organized and easily accessible. They’re an excellent resource for financial analysts, business analysts, corporate executives, portfolio managers, and finance students.
Are you looking to gain a deeper understanding of financial ratios? Learn how to assess a company’s financial health and performance with our Financial Ratio Analysis course.