Financial ratios are powerful tools to help summarize financial statements and the health of a company or enterprise. Learn the most useful financial ratios here.
Frequently Asked Questions
  • Why are financial ratios critical in financial analysis?

    Financial ratios are useful tools for investors to better analyze financial results and trends over time. These ratios can also be used to provide key indicators of organizational performance, making it possible to identify which companies are outperforming their peers. Managers can also use financial ratios to pinpoint strengths and weaknesses of their businesses in order to devise effective strategies and initiatives.

  • What are the main uses of financial ratios?

    Financial ratios are widely used in financial analysis to determine how companies are performing internally and/or relative to one another. These ratios generally fall within one of four types of measurements: profitability, liquidity, solvency, and valuation. Understanding and applying ratios from all of these categories can enable investors to make smarter stock purchases and potentially avoid hefty losses.

  • What financial ratio measures risk?

    Several financial ratios can be used to measure a company’s risk level, particularly in relationship to servicing debts and other obligations. These financial ratios include the debt-to-capital ratio, the debt-to-equity (D/E) ratio, the interest coverage ratio, and the degree of combined leverage (DCL). Analyzing risk is useful for both bankers deciding whether to grant loans as well as private equity investors picking companies to invest in.

  • What is solvency vs. liquidity?

    Solvency and liquidity are both terms that are related to a business’ financial health. Solvent companies are those that own more in assets than they owe in debt, which means they have a greater capacity to meet long-term financial commitments. Companies that are adequately liquid can meet their short-term financial commitments and are able to sell assets to swiftly raise cash if need be. Healthy companies are those that are both solvent and possess adequate liquidity.

Key Terms

Explore Financial Ratios

Cash Ratio
Cash Ratio: Definition, Formula, and Example
Current Ratio
Current Ratio Explained With Formula and Examples
Debt-to-Equity (D/E) Ratio
Debt-to-Equity (D/E) Ratio Formula and How to Interpret It
Debt-to-Capital Ratio
Debt-to-Capital Ratio: Definition, Formula, and Example
Debt Ratio
What Is the Debt Ratio?
Equity Multiplier
What Is the Equity Multiplier? Definition, Formula, and Examples
Fixed Asset Turnover Ratio
Fixed Asset Turnover Ratio Explained With Examples
Gross Profit Margin
Gross Profit Margin (GP): Formula for How to Calculate and What GP Tells You
Liquidity Ratio
Understanding Liquidity Ratios: Types and Their Importance
Price-to-Sales (P/S) Ratio
Price-to-Sales (P/S) Ratio: What It Is, Formula To Calculate It
Price to Book Ratio
Price-to-Book (PB) Ratio: Meaning, Formula, and Example
Profitability Ratios
Profitability Ratios: What They Are, Common Types, and How Businesses Use Them
Quick Ratio
Quick Ratio Formula With Examples, Pros and Cons
Ratio Analysis
Financial Ratio Analysis: Definition, Types, Examples, and How to Use
Return on Equity (ROE) Calculation and What It Means
Return On Assets
Return on Assets (ROA): Formula and 'Good' ROA Defined
Solvency Ratio
What Is a Solvency Ratio, and How Is It Calculated?
Total-Debt-to-Total-Assets Ratio
Total-Debt-to-Total-Assets Ratio: Meaning, Formula, and What's Good
CAPE Ratio
CAPE Ratio (Shiller PE Ratio): Definition, Formula, Uses, Example
a woman doing yoga in front of a laptop
Key Financial Ratios to Analyze Healthcare Stocks
Compound Annual Growth Rate (CAGR) Definition
Compound Annual Growth Rate (CAGR) Formula and Calculation
Women discussing something in an office
Book Value vs. Market Value: What's the Difference?
Return on Investment vs. Internal Rate of Return: What's the Difference?
People present during a business meeting
What Is a Good PEG Ratio for a Stock? PEG Ratio Defined
Team working on something together
EBIT vs. EBITDA: What's the Difference?
Woman working on something
What Is a Good Expense Ratio for Mutual Funds?
Business team going over things
What Is the Formula for Calculating Free Cash Flow?
Man working on something complicated
Earnings Per Share (EPS) vs. Diluted EPS: What’s the Difference?
the hands of two people going over numbers on a paper with a calculator
Current Ratio vs. Quick Ratio: What's the Difference?
Coworkers working at a computer
How Do You Calculate Shareholders' Equity?
Businesswoman taking inventory
What Is the Formula for Calculating Earnings per Share (EPS)?
Woman working from home
How to Calculate Return on Equity (ROE)
Coworkers at a cafe calculating something on a computer
Levered Cash Flow vs. Unlevered Free Cash Flow: What's the Difference?
Man working from home
Using the Price-to-Book (P/B) Ratio to Evaluate Companies
Average Annual Growth Rate (AAGR)
Average Annual Growth Rate (AAGR): Definition and Calculation
Book-to-Market Ratio
Book-to-Market Ratio Definition
Book Value Per Share (BVPS)
Book Value Per Share (BVPS): Definition, Formula, How to Calculate, and Example
Capital Asset Pricing Model (CAPM) Definition
Capital Asset Pricing Model (CAPM) and Assumptions Explained
Capital Expenditure
Capital Expenditure (CapEx) Definition, Formula, and Examples
Degree of Operating Leverage
Degree of Operating Leverage (DOL)
Business team
Dividend Payout Ratio Definition, Formula, and Calculation
Debt-Service Coverage Ratio (DSCR)
Debt-Service Coverage Ratio (DSCR): How to Use and Calculate It
DuPont Analysis
Dupont Analysis: The Dupont Formula Plus How To Calculate and Use It
Earnings Per Share (EPS) Definition
Earnings Per Share (EPS): What It Means and How to Calculate It
Two businessmen shaking hands
Enterprise Value (EV) Formula and What It Means
Expense Ratio
Expense Ratio: Definition, Formula, Components, Example
Goodwill (Accounting): What It Is, How It Works, How To Calculate
Gross Margin
Gross Margin: Definition, Example, Formula, and How to Calculate
Two coworkers discussing something
Interest Coverage Ratio: Formula, How It Works, and Example
Inventory Turnover
Inventory Turnover Ratio: What It Is, How It Works, and Formula
Internal Rate of Return (IRR)
Internal Rate of Return (IRR) Rule: Definition and Example
Leverage Ratio
Leverage Ratio: What It Is, What It Tells You, How To Calculate
Financial Leverage
What Is Financial Leverage, and Why Is It Important?
Net Profit Margin
What is Net Profit Margin? Formula for Calculation and Examples
Two coworkers talking in a meeting room
Operating Leverage: What It Is, How It Works, How To Calculate
Payout Ratio
Payout Ratio: What It Is, How To Use It, and How To Calculate It
Price/Earnings-to-Growth (PEG) Ration
Price/Earnings-to-Growth (PEG) Ratio: What It Is and the Formula
Rate of Return
Rate of Return (RoR) Meaning, Formula, and Examples
Receivable Turnover Ratio
Receivables Turnover Ratio Defined: Formula, Importance, Examples, Limitations
Reserve Ratio
What Is the Reserve Ratio, and How Is It Calculated?
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