Introducing series of articles explaining different financial ratios for the beginners. In the first article we will cover categorization of various financial ratios. Financial ratios play important role for both investors and also for the traders. Traders can create different algorithm depending on different financial ratio comparison and placing long-short order on equities.
There are six categories of Financial Ratios namely:
- Market Value Ratios
- Liquidity Ratios
- Performance Ratios
- Cash Flow Ratios
- Profitability Ratios
- Debt Ratios
Market Value Ratios
Also known as Valuation Ratios, are financial metrics that bridge a company’s financial performance with the perception of its value in the stock market. Unlike other ratios that focus solely on internal company data (like profitability or liquidity), market value ratios explicitly incorporate the company’s current stock price. Following are the major market value ratios.
- Dividend Payout Ratio
- Dividend Yield
- Earnings Per Share
- Enterprise Value
- Price to Book Value Ratios
- Price to Earnings Ratios
Liquidity Ratios
They are a class of financial metrics that measure a company’s ability to meet its short-term financial obligations (debts due within one year) using its short-term assets (assets that can be quickly converted into cash).
Essentially, they assess how easily a company can turn its assets into cash to pay its immediate bills. Following are the major liquidity ratios
- Acid Test
- Cash Conversion Cycle
- Cash Ratio
- Current Ratio
- Operating Cash Flow
- Quick Ratio
- Working Capital
Performance Ratios
They are often called Profitability Ratios or Efficiency Ratios, are financial metrics that measure how effectively a company is utilizing its assets, managing its expenses, and generating profits from its operations. They essentially tell you how well a company is performing in terms of making money and using its resources.
- Average Collection Period
- Fixed Assets Turnover
- Gross Profit Margin
- Inventory Turnover
- Receivable Turnover
- Total Assets Turnover
Cash Flow Ratios
Cash Flow Ratios are financial metrics that use information from a company’s Statement of Cash Flows to assess various aspects of its financial health, often focusing on its ability to generate and manage actual cash. Unlike ratios that rely on accrual-based accounting figures (like net income), cash flow ratios provide a more direct and less manipulable view of a company’s cash-generating power. They are:
- Cash Flow Coverage
- Dividend Payout Ratio
- Free cash Flow
- Operating Cash Flow
Profitability Ratios
Profitability Ratios are financial metrics that measure a company’s ability to generate earnings (profits) relative to its revenue, assets, operating costs, and shareholders’ equity. They essentially tell you how efficiently a company is transforming its business activities into financial gains. Following are main ratios
- Current Yield
- Profit Margin
- Return on Assets
- Return on Net Assets
- Return on Equity
- Return on Investment
Debt Ratios
Debt Ratios, also known as Leverage Ratios or Solvency Ratios, are financial metrics that evaluate a company’s ability to meet its long-term financial obligations. They assess the extent to which a company uses debt to finance its assets and operations, and its capacity to service that debt.
- Asset to Equity
- Asset Turnover
- Cash flow to debt ratio
- Debt Ratio
- Debt to Equity
- Equity Multiplier
- Interest Coverage
In the next article we will cover every single financial ratios in detail. Stay tuned and keep reading.
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