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What is a financial ratio?

Financial Ratio

It's the quantitative relation between two selected numerical values taken from a company's financial statements. Many standard ratios are utilised to assess the financial condition of a firm; these ratios can be used by managers, current and potential shareholders and a firm's creditors to gain insight into the company's performance.

Where have you heard about financial ratios?

Analysis of financial ratios is widely undertaken by analysts, commentators and credit rating agencies whenever a company posts results or plans a merger or acquisition. Here, for example, S&P Global Ratings considers the impact of a proposed acquisition on ONGC's financial ratios.

What you need to know about financial ratios.

Ratios can be expressed as a decimal value or an equivalent percentage value. Among the many types of financial ratio are:

  • Activity ratios, which measure how quickly a firm converts non-cash assets to cash assets
  • Debt ratios, which show the firm's ability to repay long-term debt
  • Liquidity ratios, which measure the availability of cash to pay debt
  • Market ratios, which calibrate investor response to owning a company's stock

Financial ratios are especially illuminating because they enable comparisons between companies, industries and different time periods.

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