Financial Ratios

There are hundreds of Financial Ratios. Financial ratios are divided into 5 major categories:

i) Profitability ratios | ii) Cash flow ratios | iii) Efficiency Ratios | iv) Value ratios | v) Leverage Ratios


I) Profitability ratios

Profitability Ratios indicate how effective a company is operating in terms of generating profits. Profitability Ratios are divided into Margin and Return Ratios.

Important Profitability Ratios:

1) Cash return on capital invested

2) Contribution margin


4) EBITDA margin

5) Gross margin

6) Net margin

7) Operating income margin

8) Return on capital employed

9) Return on debt

10) Return on equity

11) Return on invested capital

12) Return on investment

13) Return on net assets

14) Return on total assets

15) Return on total capital


II) Cash Flow Ratios

Cash Flow Ratios evaluate the ability of a company to meet its current liquidity needs. That means to have sufficient cash-flows to pay its obligations at the minimum cost and be able to take advantage of investment and other opportunities.

Important Cash flow ratios:

1. Cash flow to debt ratio

2. Cash flow to sales ratio

3. Dividends coverage ratio

4. Free to Operating cash flow ratio

5. Operating cash flow ratio


III) Efficiency Ratios

Efficiency ratios evaluate the efficiency of a business in managing its assets. For example how effectively a business is able to manage its inventory.

Important Efficiency ratios:

1. Cash cycle

2. Equity turnover

3. Asset turnover

4. Sales per employee

5. Inventory turnover ratio

6. Payable turnover

7. Receivable turnover ratio

8. Day sales outstanding

9. Days inventory outstanding

10. Days payable outstanding



IV) Value ratios

Value ratios are measuring the worth of a company's shares. Value ratios include either the current price of the company’s share or the whole market value (share price X number of shares outstanding).

Important Value Ratios:

1) EPS (earnings per share)

2) P/E (price/earnings)

3) Price / Cash ratio

4) Dividend Yield (%)

5) P/Bv (Price to Book Value)

6) Market / Book Ratio

7) P/S (Price to Sales Ratio)


V) Leverage ratios

Leverage Ratios evaluate the leverage performance of different activities in a company. Such activities include equity, assets, debt, income and operating costs.

Important Leverage Ratios:

1) Capital employed

2) Capital expenditure ratio

3) Capitalization ratio

4) Debt ratio

5) Debt to equity ratio

6) Debt/EBITDA ratio

7) Equity ratio



Financial Ratios


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