Financial Ratios - The Strategic CFO® (2024)

• By: Dan
• September 24, 2021

See also:
Quick Ratio Analysis
Price to Book Value Analysis
Price Earnings Growth Ratio Analysis
Time Interest Earned Ratio Analysis

Use of Financial Ratios

Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when performingfinancial ratio analysisis trend analysis. Financial ratios are derived from the three financial statements;Balance Sheet,Income StatementandStatement of Cash Flows.

Financial ratios are used inFlash Reportsto measure and improve the financial performance of a company on a weekly basis.

Financial Ratio Categories

The following five (5) major financial ratio categories are included in this list.

• Liquidity Ratios
• Activity Ratios
• Debt Ratios
• Profitability Ratios
• Market Ratios

Liquidity Ratios

Liquidity ratios measure whether there will be enough cash to pay vendors and creditors of the company. Some examples of liquidity ratios include the following:

• Current Ratio
• Acid Test Ratio(Quick Ratio)

Activity Ratios

Activity ratios measure how long it will take the company to turn assets into cash. Some examples of activity ratios include the following:

• Daily Sales Outstanding(DSO)
• Accounts Receivable Turnover
• Daily Payable Outstanding
• Accounts Payable Turnover
• Inventory Days Outstanding
• Inventory Turnover

Debt Ratios

Debt ratios measure the ability of the company to pay its’ long term debt. Some examples of debt ratios include the following:

• Times Interest Earned Ratio
• Debt Ratio
• Debt to Equity Ratio(D/E Ratio)
• Fixed Charge Coverage Ratio
• Debt Service Coverage Ratio (DSCR)

Profitability Ratios

The profitability ratios measure the profitability and efficiency in how the company deploys assets to generate a profit. Some examples of profitability ratios include the following:

• Gross Profit Margin
• Operating Profit Margin Ratio
• Net Profit Margin
• Return on Equity Ratio(ROE Ratio)
• Return on Investment Ratio (ROI Ratio)

Market Ratios

The market ratios measure the comparative value of the company in the marketplace. Some examples of market ratios include the following:

• Price Earnings Ratio(P/E Ratio)
• Earnings per Share (EPS)
• Price to Book Value Ratio(PBV Ratio)
• Price to Sales Ratio
• Dividend Yield
• Price Earnings Growth Ratio(PEG Ratio)

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