Financial ratio

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Financial ratios are formed from two or more numbers taken from the financial statements of businesses. The numbers may be taken from the Balance sheet, the Income statement, or the Cash flow statement and combined in any number of combinations. Rarely are numbers taken from the Statement of Retained Earnings.

They are used by

debt issuers for analysing credit risk. They may be stipulated in the debt covenants for determining cause for default.
business insiders for evaluating performance of people (employee stock options) or projects, and by
stock pickers using fundamental analysis who use past performance to judge management and predict future performance.

The ratios quantify many aspects of the business, but are generally not used in isolation from the financial statements, but are considered an integral part of financial statement analysis. The results of a ratio give rise to the question "why?"; further analysis is needed to answer. The ratios allow for comparisons:

between companies,
between industries,
between different time periods of one company and
between a company and the industry average.

The ratios of firms in different industries, which face different risks, capital requirements, and competition are not usually comparable.

1 Ratios
2 Derivative valuation
3 See also
4 External links

[edit] Ratios

[edit] Efficient translation of sales into profits

[edit] Efficient use of assets to generate profits

Return on assets (ROA), Return on net assets (RONA)
Return on equity (ROE)
Return on capital (ROC), Risk adjusted return on capital (RAROC)
Return on capital employed (ROCE)
Inventory Turnover
Cash flow return on investment (CFROI)

Collection period (period average) Collection period (period end) days Inventory

[edit] Leverage

Debt to assets ratio
Debt to equity ratio
Interest coverage ratio
Payback period: How many years of operating earnings are needed to payoff the debt : Debt/EBITDA