Financial Ratios

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Financial ratios are tools used by analysts, investors, and managers to evaluate a company's financial performance and to make informed decisions. These ratios provide valuable insights into various aspects of a company's operations, profitability, liquidity, and solvency. By analyzing financial ratios, stakeholders can assess the financial health of a company and compare it to industry benchmarks and competitors.

Categories of Financial Ratios

Financial ratios can be broadly categorized into four main types:

  1. Liquidity ratios: These ratios measure a company's ability to meet its short-term obligations with its current assets.
  2. Profitability ratios: These ratios assess a company's ability to generate profits relative to its revenue, assets, and equity.
  3. Leverage ratios: These ratios evaluate a company's capital structure and its ability to meet long-term debt obligations.
  4. Efficiency ratios: These ratios measure how effectively a company utilizes its assets to generate revenue and manage its operations.

Common Financial Ratios

Some of the most commonly used financial ratios include:

Ratio Description
Current Ratio Calculates the company's ability to pay off its short-term liabilities with its current assets.
Return on Equity (ROE) Measures the company's profitability relative to its shareholders' equity.
Debt-to-Equity Ratio Indicates the proportion of debt and equity used to finance a company's operations.
Inventory Turnover Shows how many times a company's inventory is sold and replaced over a specific period.

Interpreting Financial Ratios

Interpreting financial ratios requires an understanding

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