# 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.

## Other Ratios

The Cash Asset Ratio measures the proportion of a company's assets that are held in cash or cash equivalents. It is calculated by dividing a company's cash and cash equivalents by its total assets. The higher the cash asset ratio, the more liquid a company's assets are.

The Capital Output Ratio measures the efficiency with which a company is using its capital to generate output. It is calculated by dividing a company's capital (such as debt and equity) by its output (such as sales or production). The higher the capital output ratio, the more efficiently a company is using its capital to generate output.

The Working Capital Ratio measures a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing a company's current assets by its current liabilities. The higher the working capital ratio, the more liquid a company is and the better able it is to pay off its short-term liabilities.

The Dividend Payout Ratio measures the percentage of a company's earnings that is paid out to shareholders as dividends. It is calculated by dividing a company's dividends per share by its earnings per share. The higher the dividend payout ratio, the more of a company's earnings are being paid out to shareholders.

The Collection Ratio measures the efficiency with which a company is collecting its accounts receivable. It is calculated by dividing a company's net credit sales by its average accounts receivable. The higher the collection ratio, the more efficiently a company is collecting its accounts receivable.

The Retention Ratio measures the percentage of a company's earnings that is retained for use in the company, rather than being paid out as dividends. It is calculated by dividing a company's retained earnings by its net income. The higher the retention ratio, the more of a company's earnings are being retained for use in the company.

The Cash Ratio measures a company's ability to pay off its current liabilities with its most liquid assets. It is calculated by dividing a company's cash and cash equivalents by its current liabilities. The higher the cash ratio, the more liquid a company is and the better able it is to pay off its short-term liabilities.

The Quick Ratio is similar to the cash ratio, but it includes additional short-term assets such as marketable securities in the numerator. It is calculated by dividing a company's cash and cash equivalents and marketable securities by its current liabilities. The higher the quick ratio, the more liquid a company is and the better able it is to pay off its short-term liabilities.

The Real Ratio measures a company's ability to pay off its current liabilities with its most liquid real assets (such as inventory and accounts receivable). It is calculated by dividing a company's real assets by its current liabilities. The higher the real ratio, the more liquid a company is and the better able it is to pay off its short-term liabilities.

## See Also