What are the four key categories of financial ratios?
Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.
Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.
- Profitability Sustainability.
- Operational Efficiency.
- Liquidity.
- Leverage (Funding â Debt, Equity, Grants)
Key Takeaways
Financial ratios can be computed using data found in financial statements such as the balance sheet and income statement. In general, there are four categories of ratio analysis: profitability, liquidity, solvency, and valuation.
- Quick ratio.
- Debt to equity ratio.
- Working capital ratio.
- Price to earnings ratio.
- Earnings per share.
- Return on equity ratio.
- Profit margin.
- Liquidity ratios.
- Activity ratios (also called efficiency ratios)
- Profitability ratios.
- Leverage ratios.
| Sl.No | Particular | Formula |
|---|---|---|
| 1 | Debt to Equity Ratio | {(Total Debt)/(Total Equity)} |
| 2 | Debt to Asset Ratio | {(Total Debt)/(Total Asset)} |
| 3 | Debt Ratio | {(Total Liabilities)/(Total Asset)} |
| 4 | Interest Coverage Ratio | {(Earnings before interest and taxes (EBIT))/(Interest Expense)} |
The main solvency ratios include the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio. Solvency ratios are often used by prospective lenders when evaluating a company's creditworthiness as well as by potential bond investors.
Ratio analysis, which was introduced in chapter 1, evaluates an organization's performance by computing the relationships of important line items found in the financial statements. There are four kinds of ratios: liquidity, profitability, activity, and capital structure.
In general, financial ratios can be broken down into four main categoriesâ1) profitability or return on investment; 2) liquidity; 3) leverage, and 4) operating or efficiencyâwith several specific ratio calculations prescribed within each.
What are four main types of financial ratios used in ratio analysis Quizlet?
- Liquidity Ratio.
- Activity Ratio.
- Leverage Ratio.
- Profitability Ratio.
- Net Interest Margin = (Interest Income â Interest Expense) / Total Assets.
- Efficiency Ratio = Non-Interest Expense / Revenue.
- Operating Leverage = Growth Rate of Revenue â Growth Rate of Non-Interest Expense.
- Liquidity Coverage Ratio = High-Quality Liquid Asset Amount / Total Net Cash Flow Amount.
- Liquidity Ratios.
- Activity Ratios.
- Debt Ratios.
- Profitability Ratios.
- Market Ratios.
| Liquidity Ratios | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Quick Ratio | (Cash + Marketable securities + Accounts receivable) / Current liabilities |
| Cash Ratio | Cash and equivalent / Current liabilities |
| Net Working Capital Ratio | Current Assets â Current Liabilities |
Financial ratio analysis is often broken into six different types: profitability, solvency, liquidity, turnover, coverage, and market prospects ratios. Other non-financial metrics may be scattered across various departments and industries.
Some of the financial ratios commonly used by investors and analysts to assess a company's financial risk level and overall financial health include the debt-to-capital ratio, the debt-to-equity (D/E) ratio, the interest coverage ratio, and the degree of combined leverage (DCL).
The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange.
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings.
The main financial system components include financial institutions, financial services, financial markets, and financial instruments.
- Net working capital. Use it to: Calculate how much money you have to put back into your business after you pay off your short-term debt. ...
- Current ratio and quick ratio. ...
- Debt to asset ratio. ...
- Solvency ratio.
What are the key accounting ratios for financial analysis?
The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.
Financial ratios fall into 6 broad categories: efficiency, liquidity, leverage, profitability, market value and coverage ratios.
- Interest Coverage Ratio = Earnings Before Interest and Tax á Current Interest.
- Debt-to-Asset Ratio = Total Debt á Total Assets.
- Equity ratio = Total shareholder equity á Total assets.
- Debt-to-Equity Ratio = Total Debt á Total Shareholder Equity.
The four key financial ratios used to analyse profitability are: Net profit margin = net income divided by sales. Return on total assets = net income divided by assets. Basic earning power = EBIT divided by total assets.
For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.
