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.

CategoryDescriptionKey ratios
Activity ratiosActivity 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 ratiosLiquidity 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 ratiosSolvency 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 ratiosProfitability 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 ratiosThese 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.


Course Downloads