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Common Ratios in Financial Analysis

Financial analysts use many ratios while analyzing a company. Since there are many ratios, it becomes easy to categorize them under broad categories. The following table lists the categories and the key ratios within each category.

Category Description Key ratios
Activity ratios Activity ratios measure how effectively a business uses its resources, such as receivables collection, inventory, etc. Also called efficiency ratios
  • Inventory Turnover
  • Days of Inventory on Hand (DOH)
  • Receivables Turnover
  • Days of Sales Outstanding (DSO)
  • Payables Turnover
  • Number of Days of Payables
  • Working capital Turnover
  • Fixed Asset Turnover
  • Total Asset turnover

 

Liquidity ratios Liquidity ratios measure a business’s ability to meet its debt obligation in the short-term
  • Current Ratio
  • Quick Ratio
  • Cash Ratio
  • Defensive Interval Ratio
  • Cash Conversion Cycle

 

Solvency ratios Solvency ratios measure a business’s ability to meet its obligations in the long-term. Also called leverage ratios. Debt Ratios

  • Debt/Asset Ratio
  • Debt/Capital Ratio
  • Debt/Equity Ratio
  • Financial Leverage Ratio

 

Coverage Ratios

  • Interest Coverage
  • Fixed Charge Coverage

 

Profitability ratios Profitability ratios measure how profitable a company is. Return on Sales

  • Gross Profit Margin
  • Operating Profit Margin
  • Pretax Margin
  • Net Profit Margin

 

Return on Investment

  • Operating ROA
  • ROA
  • Return on Total Capital
  • ROE
  • Return on Common Equity

 

Valuation ratios These ratios measure the value of a company.
  • Price/Equity Ratio
  • Price/Cash Flow
  • Price/Sales
  • Price/Book Value
  • Earnings Per Share
  • Cash Flow per Share
  • EBITDA per Share
  • Dividends per Share
  • Dividend Payout Ratio
  • Retention Rate
  • Sustainable Growth Rate

 

An analyst uses a combination of these ratios to analyze various aspects of a business. We will look at all these ratios in the following articles.

 

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