Financial Ratio
What is Financial Ratio
Financial ratios are mathematical calculations that are used to analyze a company's financial performance and assess its financial health. There are many different financial ratios that can be calculated, and each one provides a different perspective on the company's financial situation.
Some common financial ratios include:
- Profit Margin: This ratio measures the percentage of sales that a company keeps as profit. It is calculated by dividing net income by net sales.
- Return on Assets (ROA): This ratio measures the profitability of a company's assets. It is calculated by dividing net income by total assets.
- Debt-to-equity ratio: This ratio measures the amount of debt that a company has relative to its equity. It is calculated by dividing total liabilities by shareholder equity.
- Current Ratio: This ratio measures a company's ability to pay its short-term debts using its current assets. It is calculated by dividing current assets by current liabilities.
- Price-to-earnings ratio (P/E ratio): This ratio compares a company's stock price to its earnings per share. It is calculated by dividing the stock price by earnings per share.
Financial ratios can be used to compare a company's performance to industry benchmarks, to assess its financial strengths and weaknesses, and to make informed investment decisions. However, it is important to keep in mind that financial ratios should be used as part of a broader analysis, rather than being relied on in isolation.
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