**What are Financial Ratios? How to define financial ratios?**

**Financial Ratios** are also known as Accounting ratios, are a relative magnitude of the different numerical values of the **financial statement** of the company. The purpose of this process is to gain meaningful information about that company. Once the number taken from the company financial statement (balance sheet, income statement, and cash flow statement) is used to perform quantitative analysis. By this, one can know about the detailed information of the company’s liquidity, Profitability, margin, rates of return, etc.

## The best book on financial ratio analysis

Table of Contents

**Financial Ratios Analysis Book**

## Major Types of financial ratios

The **ratios **are categorized as follows:

- Short-term Solvency Ratios
- Debt Management Ratios
- Asset Management Ratios
- Profitability Ratios
- Market Value Ratios

## What is Financial Ratio Analysis?

*Financial Ratio Analysis* is the process by which we compare two item or numerical values of the financial statement in order to assess the company’s financial position with respect to liquidity, leverage, valuation, growth, margins, profitability, rates of return, and much more.

in simple we can say Ratio Analysis is Financial statement Analysis, used to take the idea of the financial performance of the company over several key areas.

## What Does Ratio Analysis Tell You?

Ratio Analysis tells us all about the details of the performance and financial health of the company. this process can be done by comparing the value taken from the financial statement of the organization.

Comparison between companies in the same sector is also another most useful application for ratio analysis. in this way, you can calculate one ratio for competitors in a given sector, and can compare across the number of businesses. through this **Ratio analysis**, you can get both **positive and negative** information about the wealth of different companies.

## List of All Financial Ratios

Enlist below there are the all financial ratios explained. mostly Ratios can be expressed in percentage by multiplying by 100%.

### What is Profitability Ratios?

Profitability ratios are used to calculate/assess a business’s ability to generate positive earnings relative to its revenue, shareholders’ balance sheet assets, and equity over time, operating costs, using data taken from a specific period of time.

- Gross Profit Rate = Gross Profit ÷ Net Sales
- Return on Sales = Net Income ÷ Net Sales
- Return on Stockholders’ Equity = Net Income ÷ Average Stockholders’ Equity

### What is Liquidity Ratios?

- Current Ratio = Current Assets ÷ Current Liabilities
- Acid Test Ratio = Quick Assets ÷ Current Liabilities
**Cash Ratio**= ( Cash + Marketable Securities ) ÷ Current Liabilities**Net Working Capital**= Current Assets – Current Liabilities

### How do we use Management Efficiency Ratios?

- Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
**Days Sales Outstanding**= 360 Days ÷ Receivable Turnover**Inventory Turnover**= Cost of Sales ÷ Average Inventory- Days Inventory Outstanding = 360 Days ÷ Inventory Turnover
- Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable
- Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover
- Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding
**Cash Conversion Cycle**= Operating Cycle – Days Payable Outstanding**Total Asset Turnover**= Net Sales ÷ Average Total Assets

### Leverage Ratios

**Debt Ratio**= Total Liabilities ÷ Total Assets**Equity Ratio**= Total Equity ÷ Total Assets- Debt-Equity Ratio = Total Liabilities ÷ Total Equity
- Times Interest Earned = EBIT ÷ Interest Expense

### Valuation and Growth Ratios

- Earnings per Share = ( Net Income – Preferred Dividends ) ÷ Average Common Shares Outstanding
- Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share
**Dividend Payout Ratio**= Dividend per Share ÷ Earnings per Share**Dividend Yield Ratio**= Dividend per Share ÷ Market Price per Share- Book Value per Share = Common SHE ÷ Average Common Shares