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.
|Activity ratios||Activity ratios measure how effectively a business uses its resources, such as receivables collection, inventory, etc. Also called efficiency ratios||
|Liquidity ratios||Liquidity ratios measure a business’s ability to meet its debt obligation in the short-term||
|Solvency ratios||Solvency ratios measure a business’s ability to meet its obligations in the long-term. Also called leverage ratios.||Debt Ratios
|Profitability ratios||Profitability ratios measure how profitable a company is.||Return on Sales
Return on Investment
|Valuation ratios||These ratios measure the value of a company.||
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.