Example of Financial Ratios
Financial ratios are tools used by investors, analysts, and financial institutions to assess the performance and financial health of a company. These ratios provide valuable insights into a company’s profitability, liquidity, solvency, and efficiency.
One commonly used financial ratio is the current ratio, which measures a company’s ability to pay its short-term obligations. It is calculated by dividing the company’s current assets by its current liabilities. A current ratio of 2 or higher is generally considered favorable, as it indicates that the company has enough assets to cover its short-term liabilities.
Another important financial ratio is the return on equity (ROE), which measures a company’s profitability by comparing its net income to its shareholders’ equity. A higher ROE indicates that the company is generating more profit for its shareholders.
The debt-to-equity ratio is a financial ratio that compares a company’s total debt to its shareholders’ equity. It is a measure of a company’s leverage and indicates the proportion of debt used to finance its assets. A high debt-to-equity ratio may indicate that the company is taking on too much debt and may be at risk of financial distress.
The gross profit margin is a financial ratio that measures a company’s profitability by comparing its gross profit to its revenue. It indicates the percentage of revenue that is left after deducting the cost of goods sold. A higher gross profit margin indicates that the company is able to generate more profit from its sales.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.