Financial ratio Analysis Purposes Flashcards
Liquidity ratio
indicate a company’s ability to meet its short-term obligations.
Current Ratio
It measures a company’s ability to cover its short-term liabilities with its short-term assets. It’s used to assess whether a company has enough liquid resources to meet its immediate financial obligations.
Quick Ratio (Acid-Test Ratio)
This ratio provides a more conservative measure of liquidity by excluding inventory from current assets. It helps to determine if a company can pay off its current liabilities without relying on the sale of inventory.
Profitability ratio
measures how well a company generates profits relative to its revenue , asset, and equity
Gross Profit Margin
It shows the percentage of revenue that exceeds the cost of goods sold. It indicates how efficiently a company is producing its goods or services.
Operating Profit Margin Ratio
tells you how much profit a company generates from its core operations compared to its total revenue, excluding non-operating expenses. It’s a measure of operational efficiency and helps investors and managers understand how effectively a company is managing its resources to generate profits.
Return on Equity (ROE)
measures how effectively a company is using shareholders’ equity to generate profit. It’s a key metric for investors to evaluate the profitability of their investment
Return on Capital Employed
measures the efficiency with which a company generates profits from its capital investments. It indicates how effectively a company utilises its capital to generate returns for both debt and equity holders, helping investors and managers assess the overall profitability and efficiency of the company’s operations.
Efficiency ratio
assess how well a company utilises its assets and manages its liabilities.
Inventory Turnover Ratio
It shows how many times a company’s inventory is sold and replaced over a period. A high ratio indicates efficient inventory management.
Accounts Receivable Turnover
This ratio measures how quickly a company collects its accounts receivable. A higher ratio suggests more efficient credit and collection policies.
Accounts Payable Turnover
It indicates how quickly a company pays off its suppliers. A higher ratio may indicate favourable credit terms or efficient cash management
Sales Revenue per Employee
This ratio measures how efficiently a company utilises its workforce to generate revenue. It helps assess labor productivity and operational efficiency. A higher sales revenue per employee suggests more effective utilisation of human resources and potentially higher profitability.
Sales Revenue to Capital Employed
compares a company’s sales revenue to the money invested in its operations. It shows how efficiently the company uses its funds to make sales. Higher ratios mean better use of money to generate sales, helping investors and managers gauge the company’s overall efficiency and profitability.
Gearing ration
It shows the proportion of debt and equity used to finance a company’s assets. It helps assess the risk associated with a company’s capital structure.
