Financial Ratios
Definition
Financial ratios are quantitative metrics used to evaluate a company's financial performance, health, and value by comparing different line items from financial statements.
Explanation
Financial ratios are categorized into several types: profitability ratios (net profit margin, ROE), liquidity ratios (current ratio, quick ratio), solvency ratios (debt-to-equity), efficiency ratios (inventory turnover), and valuation ratios (P/E ratio, P/B ratio).
Ratios are most useful when compared to industry benchmarks, historical trends, or competitor data. No single ratio tells the whole story, so analysts typically use a combination of ratios to assess a company's financial health.
Example
A company with $2 million in current assets and $1 million in current liabilities has a current ratio of 2.0, indicating it can comfortably cover its short-term obligations.