# 6 Basic Financial Ratios and What They Reveal

It measures how many times a company could cover its interest charges from its earnings. The debt-to-capital ratio helps you understand a company’s capital structure and financial solvency. It looks at how the business is funded, comparing the proportion of debt and capital.

One of the most well-known valuation ratios is called the Price to Earnings (P/E) Ratio. As an investor, this is the process you go through, or should go through, every time you consider whether or not an investment is worthwhile. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

It measures a company’s profitability against its book value, this is the biggest limitation of this ratio too. In other words, it can be said that return on equity measures a company’s efficiency to generate bookkeeping for startups profits using shareholders’ equity. It shows whether a company has enough current assets to pay off its short-term borrowings. Current assets are assets that can be converted into liquid cash easily.

The best way to use P/E is often as a relative value comparison tool for stocks you’re interested in, or you might want to compare the P/E of one or more stocks to an industry average. A P/S ratio of less than one is considered good as it defines that an investor is spending less money on unit sales. This https://marketresearchtelecast.com/financial-planning-for-startups-how-accounting-services-can-help-new-ventures/292538/ ratio is used in comparing two companies in the same industry. Generally, companies having a ROA of greater than 5% are considered good. In this case, the total liability of the company is \$420M (\$300M + \$120M), but the equity is only \$300M so, in the calculation of ROE, only equity will be used.

## Market Value ratios

Along these same lines is the earnings per share or EPS, another quick ratio to use when assessing future earnings. Earnings per share measures the net income you’ll receive for each share of a company’s stock. To calculate EPS, you must divide net income by the number of outstanding common shares during the financial year. Also known as leverage ratios, solvency ratios directly measure a company’s total debt against its assets, equity, and earnings.

​The final category of financial ratios included in our list is the business valuation ratio. As its name implies, a profitability ratio simply measures an organization’s ability to generate profits from its regular business operations. Two of the most common solvency ratios you can use are the debt-to-equity ratio, and the times interest earned ratio.

## What Is Fundamental Analysis?

The term liquidity refers to how easily a company can turn assets into cash to pay short-term obligations. The working capital ratio can be useful in helping you measure liquidity. It represents a company’s ability to pay its current liabilities with its current assets. Using your balance sheet and income statement, you can identify your cost of goods sold number to use within the formula above. Keeping track of your inventory turnover ratio can help you see the ebbs and flows of inventory. This can help you better predict how much inventory to keep in stock over a particular period of time.

If the value is below one, it indicates that the company holds less debt. Hope you enjoy the above detailed list of financial ratios​, and make sure that you don’t forget to download our FREE “The Ultimate Financial Ratio Cheat Sheet”. We’ve covered a lot of financial ratios on Study Finance (too many to list all on one page). Fundamental analysis is the analysis of a security to discover its true or intrinsic value.

## List of Valuation Ratios: Formula & Analysis

Organizations can also utilize financial ratios to check whether there is a trend in financial figures. Large organizations gather information from financial reports over a large number of reporting periods. Whether you’re a seasoned analyst or simply an individual intrigued by the world of finance, this article offers a comprehensive guide to understanding financial ratios. On the industry overview page, click on the link for Ratio Components to see financial ratios for the top companies in the industry. What we can see, however, is that the company is financed more with shareholder funds (equity) than it is with debt as the debt-to-asset ratio for both years is under 50% and dropping.

It’s a short-term liquidity measure showing how often a company pays suppliers, vendors, and lenders in a given period. The activity ratio helps you assess the overall productivity levels of your employees. It compares your team’s actual output (in terms of time) with the amount of time allocated.

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