Articles on Ratio Analysis

What is Ratio Analysis ?

Ratio analysis is one of the oldest methods of financial statements analysis. It was developed by banks and other lenders...

Techniques Used in Ratio Analysis

Ratio, as the name suggests, is nothing more than one number divided by the other. However, they become useful when...

Importance of Different Ratios to Different User Groups

As we have seen earlier that there is a wide variety of financial ratios available. They fall into many categories...

Limitations of Ratio Analysis

Ratio analysis, without a doubt, is amongst the most powerful tools of financial analysis. Any investor, who wants to be...

Capital Structure Ratios – Meaning and Importance

Capital structure ratios are very important to analyze the financial statements of any company for the following reasons: Same Business...

Debt to Equity Ratio – Meaning, Assumptions and Interpretation

The debt to equity ratio is the most important of all capital adequacy ratios. It is seen by investors and...

Debt Ratio – Formula, Meaning, Assumptions and Interpretation

The debt ratio is the second most important ratio when it comes to gauging the capital structure and solvency an...

Equity to Fixed Assets Ratio – Meaning, Assumptions and Interpretation

Formula Equity to Fixed Assets Ratio = Equity / Total Fixed Assets Equity includes the retained earnings Total Fixed assets...

Proprietary Ratio – Meaning, Assumptions and its Interpretation

The proprietary ratio is not amongst the commonly used ratios. Very few analysts prescribe its usage. This is because in...

Interest Coverage Ratio – Meaning, Assumptions and Interpretation

The interest coverage ratio is a number that has a lot of importance for the creditors of the firm. This...

Degree of Financial Leverage Ratio

A high debt equity ratio makes the company financed by debt more than by equity. Therefore there are fixed interest...

Degree of Operating Leverage Ratio

The degree of operating leverage of a company is very important from an investor’s standpoint. Although it shows the riskiness...

Degree of Combined Leverage Ratio – Formula, Examples and Interpretation

Most firms use both operating leverage and capital leverage to some extent. In today’s business world it is almost impossible...

Introduction to Cash Flow Ratios

Once upon a time, investors and analysts used to believe in ratios that have been calculated based on the earnings...

Cash Flow to Debt Ratio – Meaning, Formula, Assumptions and Interpretation

Formula Cash Flow to Debt Ratio = Operating Cash Flow/Total Debt Meaning The cash flow to debt ratio tells investors...

Free Cash Flow to Operating Cash Flow Ratio – Meaning, Formula and Interpretation

The free cash flow to operating cash flow ratio is different from other ratios. It is different in the sense...

Operating Cash Flow to Sales Ratio – Formula, Assumptions and Interpretation

Formula The formula for this ratio can be easily judged by its name: Operating Cash Flow to Sales Ratio =...

Market Related Ratios – Meaning and Its Importance

Most investors do not invest directly in the company i.e. they are not promoters of the company. Rather they invest...

Price to Earnings (PE) Ratio – Meaning, Formula and Interpretation

The price to earnings ratio is the most fundamental of all market related ratios. It has been used for decades...

Price Earnings Growth (PEG) Ratio – Formula, Assumptions and Interpretation

The Price Earnings Growth (PEG) Ratio is one of the first variations that were made to the Price to Earnings...

Price to Book Value Ratio – Formula, Meaning, Assumptions and Interpretation

Formula Price to Book Value = Current Market Price / Total Assets – Intangible Assets The value of assets is...

Price to Cash Flow Ratio – Meaning, Formula and Interpretation

“Cash is King” say the bigwigs on Wall Street. That is why the valuation of shares is done on the...

Price to Sales Ratio – Formula, Meaning, Assumptions and Interpretation

Formula Price to Sales Ratio = Current Market Price / Reported Sales Revenue Many companies state their revenue after removing...

Dividend Yield Ratio – Formula, Meaning, Assumptions and Interpretation

Investors can be classified into types. The two predominant types are growth oriented investors and value oriented investors. Growth oriented...

Put Call Ratio – Formula, Meaning, Variations and Interpretation

The put call ratio is the only financial ratio that does not compare the current market price to any financial...

Introduction to Liquidity Ratios

Liquidity can be defined as the ability of a firm to make good its short term obligations. Most businesses function...

Current Ratio – Formula, Meaning, Assumptions and Interpretations

The current ratio is the most popularly used metric to gauge the short term solvency of a company. This article...

Quick Ratio – Meaning, Formula and Assumptions

The quick ratio is a variation of the current ratio. However, a quick ratio is considered by many to be...

Cash Ratio – Meaning, Formula and Assumptions

The cash ratio is limited in its usefulness to investors and financial analysts. It is the least popular of the...

What is Negative Working Capital ?

Traditional financial analysts would consider a negative working capital i.e. having more current liabilities than current assets, a sign of...

Introduction to Turnover Ratios

Turnover ratios (also known as efficiency ratios) are a very important class of ratios. These ratios are not only used...

Accounts Receivable Turnover Ratio

Accounts receivable are a very important part of the current assets of any business. Like inventory, accounts receivable are considered...

Accounts Payable Turnover Ratio

Just like accounts receivable turnover ratio show the financing that the firm is providing to its buyers interest free, the...

How to Use Accounts Payable Turnover Ratio to Bargain with Buyers

It is a myth that financial ratios are to be used only by investors and analysts in deriving a fair...

Fixed Asset Turnover Ratio

Fixed assets i.e. property, plant and equipment represent the single largest investment any company makes in its operations. It is...

Inventory Turnover Ratio – Meaning, Formula and Interpretation

A company is said to be more efficient when it keeps the least inventory on hand to make the sales...

Working Capital to Sales Ratio – Meaning, Formula, Assumptions and Interpretation

Formula Working Capital to Sales Ratio = Working Capital / Sales Meaning Stating the working capital as an absolute figure...

Introduction to Profitability Ratios

The ultimate aim of all business is to generate profit. That is what the investors invest for, management plans for...

What are Common Size Statements ?

Common size statements are not financial ratios. Rather they are a way of presenting financial statements that makes them more...

What are Profit Margins ?

The untrained investor uses profit and profit margin interchangeably. This is not technically correct. The difference may be minor but...

Return on Assets (ROA) – Meaning, Formula, Assumptions and Interpretation

Another metric that is widely used by investors to gauge the profitability of a company is Return on Assets (ROA)....

Return on Equity (ROE) – Meaning, Formula, Assumptions and Interpretation

Return on Equity (ROE) is probably the most important number in the financial universe. Every company is driven by profit...

Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) is another popular metric that is used widely in financial analysis. The reason for its...

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Articles on Ratio Analysis