Financial Ratios Definition
A financial ratio is a mathematical comparison of two financial figures. Ratios are used to gain insight into a company’s financial condition, profitability, and liquidity. This information can be useful for both internal decision-making and external comparisons, such as with industry averages.
There are many different types of ratios that can be calculated, but some common examples include:
· Liquidity ratios – show a company’s ability to pay its short-term debts
· Efficiency ratios – show how well a company is using its assets and resources
· Profitability ratios – show how much profit a company is making in relation to its revenue or expenses
· Solvency ratios – show a company’s long-term debt-paying ability
Financial ratios can be helpful in identifying trends over time, comparing companies within an industry, or benchmarking against similar companies. However, it is important to remember that ratios should not be used in isolation but rather as part of a larger analysis.
