What are common financial ratios used for performance analysis?
Common financial ratios help you evaluate a company’s liquidity, profitability, efficiency, leverage, and market valuation. These ratios turn raw financial data into clear indicators of performance, risk, and operational strength. The most widely used ratios fall into five major categories, each answering a different question about the business.
🔹 Liquidity Ratios
These measure whether a company can meet short‑term obligations.
Current Ratio — Current Assets ÷ Current Liabilities. Indicates short‑term financial stability.
Quick Ratio — (Current Assets − Inventory) ÷ Current Liabilities. A stricter liquidity test.
Cash Ratio — Cash ÷ Current Liabilities. Shows the ability to pay debts immediately.
🔹 Profitability Ratios
These show how effectively a company generates profit.
Operating Margin — Operating Income ÷ Net Sales. Measures core profitability.
Net Profit Margin — Net Profit ÷ Revenue. Indicates overall profitability.
Return on Assets (ROA) — Net Income ÷ Total Assets. Shows how well assets generate earnings.
Return on Equity (ROE) — Net Income ÷ Shareholders’ Equity. Measures returns to owners.
🔹 Efficiency Ratios
These assess how well a company uses its resources.
Asset Turnover — Net Sales ÷ Average Total Assets. Indicates how efficiently assets generate revenue.
Inventory Turnover — COGS ÷ Average Inventory. Shows how quickly inventory is sold.
🔹 Leverage (Solvency) Ratios
These measure financial risk and debt capacity.
Debt‑to‑Equity — Total Debt ÷ Shareholders’ Equity. Shows reliance on debt financing.
Interest Coverage — EBIT ÷ Interest Expense. Indicates ability to pay interest.
🔹 Market Value Ratios
These help investors evaluate valuation and returns.
Price‑to‑Earnings (P/E) — Share Price ÷ Earnings Per Share. Shows how the market values earnings.
Dividend Yield — Dividends ÷ Share Price. Measures investor return.
These ratios together provide a comprehensive view of performance, stability, and risk.
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