What are the five basic types of financial ratios?

Asked By: Domina Graeb | Last Updated: 5th April, 2020
Category: business and finance debt factoring and invoice discounting
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Financial ratios are the ratios that are used to analyze the financial statements of the company to evaluate performance where these ratios are applied according to the results required and these ratios are divided into five broad categories which are liquidity ratios, leverage financial ratios, efficiency ratio,

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In respect to this, what are the 5 major categories of ratios?

The five (5) major categories in the financial ratios list include the following :

  • Liquidity Ratios.
  • Activity Ratios.
  • Debt Ratios.
  • Profitability Ratios.
  • Market Ratios.

Also Know, what are 3 types of ratios? The three main categories of ratios include profitability, leverage and liquidity ratios.

Also know, what are the 5 categories of financial ratios and their purpose?

In general, financial ratios can be broken down into four main categories—1) profitability or return on investment; 2) liquidity; 3) leverage, and 4) operating or efficiency—with several specific ratio calculations prescribed within each.

What are financial ratios used for?

Financial ratios offer entrepreneurs a way to evaluate their company's performance and compare it other similar businesses in their industry. Ratios measure the relationship between two or more components of financial statements. They are used most effectively when results over several periods are compared.

30 Related Question Answers Found

What is a good liquidity ratio?

A good liquidity ratio is anything greater than 1. It indicates that the company is in good financial health and is less likely to face financial hardships. The higher ratio, the higher is the safety margin that the business possesses to meet its current liabilities.

What are the most important liquidity ratios?

Most common examples of liquidity ratios include current ratio, acid test ratio (also known as quick ratio), cash ratio and working capital ratio. Different assets are considered to be relevant by different analysts.

How do you analyze financial ratios?

  1. Uses and Users of Financial Ratio Analysis.
  2. Current ratio = Current assets / Current liabilities.
  3. Acid-test ratio = Current assets – Inventories / Current liabilities.
  4. Cash ratio = Cash and Cash equivalents / Current Liabilities.
  5. Operating cash flow ratio = Operating cash flow / Current liabilities.

What is a good acid test ratio?

Generally, the acid test ratio should be 1:1 or higher; however, this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

What is a good current ratio?


Acceptable current ratios vary from industry to industry and are generally between 1.5% and 3% for healthy businesses. If a company's current ratio is in this range, then it generally indicates good short-term financial strength.

What are the most important financial ratios?

The Most Important Financial Ratios for New Investors
  • The 5 Categories of Financial Ratios. All financial ratios fall into one of five categories.
  • Price to Cash Flow Ratio.
  • Price to Earnings Ratio—The P/E Ratio.
  • The PEG Ratio.
  • Asset Turnover Ratio.
  • Current Ratio.
  • Debt to Equity Ratio.
  • Gross Profit Margin.

What are examples of liquidity ratios?

Examples of liquidity ratios are:
  • Current ratio. This ratio compares current assets to current liabilities.
  • Quick ratio. This is the same as the current ratio, but excludes inventory.
  • Cash ratio. This ratio compares just cash and readily convertible investments to current liabilities.

What is ratio in financial management?

A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors.

What are the basic financial ratios?

6 Basic Financial Ratios and What They Reveal
  • Working Capital Ratio. Assessing the health of a company in which you want to invest involves understanding its liquidity—how easily that company can turn assets into cash to pay short-term obligations.
  • Quick Ratio.
  • Earnings per Share.
  • Price-Earnings Ratio.
  • Debt-Equity Ratio.
  • Return on Equity.

What is a good working capital ratio?


Generally, a working capital ratio of less than one is taken as indicative of potential future liquidity problems, while a ratio of 1.5 to two is interpreted as indicating a company on solid financial ground in terms of liquidity. An increasingly higher ratio above two is not necessarily considered to be better.

What is primary ratio?

The Primary (T/TFC) ratio is one of a number of performance measures potentially useful in the effort to implement a system of management based on the Theory of Constraints (TOC). The Primary ratio = (Total Sales Revenue—Total Direct Material Costs)/Total Factory Costs.

What is quick ratio formula?

The quick ratio is a measure of how well a company can meet its short-term financial liabilities. Also known as the acid-test ratio, it can be calculated as follows: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.

How is liquidity defined?

Liquidity
  • Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value.
  • Cash is universally considered the most liquid asset, while tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid.

What ratios should investors look at?

Between the numbers
  • We bring you eleven financial ratios that one should look at before investing in a stock . P/E RATIO.
  • PRICE-TO-BOOK VALUE.
  • DEBT-TO-EQUITY RATIO.
  • OPERATING PROFIT MARGIN (OPM)
  • EV/EBITDA.
  • PRICE/EARNINGS GROWTH RATIO.
  • RETURN ON EQUITY.
  • INTEREST COVERAGE RATIO.

What is leverage ratio?


The leverage ratio is the proportion of debts that a bank has compared to its equity/capital. There are different leverage ratios such as. Debt to Equity = Total debt / Shareholders Equity.

What are different types of ratio?

There are mainly 4 different types of accounting ratios to perform a financial statement analysis; Liquidity Ratios, Solvency Ratios, Activity Ratios and Profitability Ratios. A financial ratio is a mathematical expression demonstrating a relationship between two independent or related accounting figures.

What are growth ratios?

Growth ratios can give an indication of how fast your business is growing. For example, one type of growth ratio is sales percentage, which compares current sales to those of the previous year. Net income percentage takes sales growth a step further by showing profit after subtracting operating costs.