Key Financial Ratios to Know for Intro to Finance

Key financial ratios are essential tools for evaluating a company's performance and financial health. They help investors, analysts, and managers make informed decisions in areas like liquidity, profitability, and risk, connecting directly to finance, investments, and personal finance strategies.

1. Current Ratio

   • Measures a company's ability to pay short-term liabilities with short-term assets.
   • A ratio above 1 indicates that the company has more current assets than current liabilities.
   • A higher current ratio suggests better liquidity and financial health.

2. Quick Ratio (Acid-Test Ratio)

   • Similar to the current ratio but excludes inventory from current assets.
   • Provides a more stringent assessment of liquidity.
   • A quick ratio above 1 indicates that a company can meet its short-term obligations without relying on inventory sales.

3. Debt-to-Equity Ratio

   • Compares a company's total liabilities to its shareholder equity.
   • A higher ratio indicates greater financial leverage and risk.
   • Important for assessing the long-term solvency and financial structure of a company.

4. Return on Equity (ROE)

   • Measures the profitability of a company in relation to shareholders' equity.
   • A higher ROE indicates effective management and strong financial performance.
   • Useful for comparing the profitability of companies in the same industry.

5. Return on Assets (ROA)

   • Indicates how efficiently a company uses its assets to generate profit.
   • A higher ROA suggests better asset management and operational efficiency.
   • Important for evaluating the overall performance of a company.

6. Profit Margin

   • Represents the percentage of revenue that exceeds total expenses.
   • A higher profit margin indicates better profitability and cost control.
   • Useful for comparing profitability across companies and industries.

7. Earnings Per Share (EPS)

   • Measures the portion of a company's profit allocated to each outstanding share of common stock.
   • A higher EPS indicates better profitability and is often used to gauge company performance.
   • Important for investors when assessing stock value and potential returns.

8. Price-to-Earnings (P/E) Ratio

   • Compares a company's current share price to its earnings per share.
   • A higher P/E ratio may indicate that the stock is overvalued or that investors expect high growth rates.
   • Useful for comparing valuation across companies in the same sector.

9. Inventory Turnover Ratio

   • Measures how many times a company's inventory is sold and replaced over a period.
   • A higher ratio indicates efficient inventory management and strong sales.
   • Important for assessing operational efficiency and liquidity.

10. Accounts Receivable Turnover Ratio

    • Measures how effectively a company collects its receivables.
    • A higher ratio indicates efficient collection processes and strong cash flow.
    • Useful for evaluating credit policies and customer payment behavior.

11. Asset Turnover Ratio

    • Indicates how efficiently a company uses its assets to generate sales.
    • A higher ratio suggests better utilization of assets.
    • Important for assessing operational efficiency and overall performance.

12. Interest Coverage Ratio

    • Measures a company's ability to pay interest on its outstanding debt.
    • A higher ratio indicates better financial health and lower risk of default.
    • Important for creditors and investors assessing a company's solvency.

13. Dividend Yield

    • Represents the annual dividend payment as a percentage of the stock price.
    • A higher yield indicates a more attractive return for investors.
    • Important for income-focused investors assessing the profitability of their investments.

14. Price-to-Book (P/B) Ratio

    • Compares a company's market value to its book value.
    • A lower P/B ratio may indicate that the stock is undervalued.
    • Useful for assessing the valuation of companies, especially in asset-heavy industries.

15. Operating Margin

    • Measures the percentage of revenue that remains after covering operating expenses.
    • A higher operating margin indicates better operational efficiency and profitability.
    • Important for comparing the performance of companies within the same industry.