Tue. Aug 9th, 2022
    Financial Ratio | Accounting - Formulas, Examples, Questions, Answers

    Financial Ratio

    Financial Ratio is the use of financial numbers to get important information about a company. The numbers found on a company’s financial statements – balance sheets, income statements, and cash flow statements – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margin, profitability, rate of return, valuation, and more.

    Financial ratio:
    Profitability Ratio, Liquidity Ratio, Solvency Ratio, Activity Ratio (Efficiency Ratio), Leverage Ratio, Market Value Ratio, Valuation Ratio and Growth Ratios

    In accounting, a ratio is a coefficient or a percentage generally calculated between two functional masses of the balance sheet or the income statement. Ratios are used to measure profitability, cost structure, productivity, solvency, liquidity, financial balance, etc.

    Read also: Accounting Formulas | Definition, Calculation and Utility

    Financial ratios can be classified into 7 groups depending on the needs of the company, namely:

    Profitability Ratio

    Profitability ratios measure a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity. For Formulas, Examples, Questions, Answers: Profitability Ratio

    Liquidity Ratio

    Liquidity ratios are financial ratios that measure a company’s ability to repay both short- and long-term obligations. For Formulas, Examples, Questions, Answers: Liquidity Ratio

    Solvency Ratio

    A solvency ratio is a performance metric that helps us examine a company’s financial health. In particular, it enables us to determine whether the company can meet its financial obligations in the long term. For Formulas, Examples, Questions, Answers: Solvency Ratio

    Activity Ratio (Efficiency Ratio)

    Efficiency ratios, also known as activity financial ratios, are used to measure how well a company is utilizing its assets and resources. For Formulas, Examples, Questions, Answers: Activity Ratio (Efficiency Ratio)

    Leverage Ratio

    Leverage ratio in finance is a general term for any technique intended to multiply profits and losses. Common leverage techniques are debt, the purchase of long-term assets and derivatives (such as warrants). For Formulas, Examples, Questions, Answers: Leverage Ratio

    Market Value Ratio

    Market value ratios are used to evaluate the share price of a company’s stock. For Formulas, Examples, Questions, Answers: Market Value Ratio

    Valuation Ratio and Growth Ratios

    A valuation ratio shows the relationship between the market value of a company or its equity and some fundamental financial metric (e.g., earnings). The point of a valuation ratio is to show the price you are paying for some stream of earnings, revenue, or cash flow (or other financial metric). For Formulas, Examples, Questions, Answers: Valuation Ratio and Growth Ratios

    Sources: PinterPandai, The Balance Small Business, WikipediaCorporate Finance Institute

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