What is a 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.