What are the Most Important Financial Ratios?

Get ahead of the curve by understanding the key financial ratios used in evaluating a company's performance.

5 Min Read

Financial ratios provide us with a snapshot of what is happening in our business and are a great way of evaluating where we are, where we want to be, and how close we are getting there. If you aren’t familiar with the various financial ratios and how to calculate them using different accounting calculators like the GST calculator or the interest rate calculator then we suggest you read on. We have written this overview to explain the most commonly used financial ratios and why they are important:

1. Debt-to-equity Ratio

This is a financial ratio that shows how much debt the company has compared to how much equity it holds (debt minus equity). It can also be used to compare different companies in an industry or between two companies in the same industry. A low value indicates that the company has significant amounts of debt compared with how much equity it holds. This ratio indicates whether or not a company has enough capital to continue operations and meet its financial obligations. If the debt-to-equity ratio is higher than 0, it indicates that there may be problems with liquidity or cash flow; if it’s lower than 1, it means that there’s plenty of money available for operations and growth opportunities.

2. Working Capital Ratio

The working capital ratio is a measure of how much money a company has on hand at any given time. This is important because if a company has a lot of short-term debt, this will affect its ability to make payments and keep its assets invested in its business. This can cause them to have difficulty paying dividends or making other investments. A high working capital ratio indicates that your company has enough cash to meet its short-term needs, but does not mean it has enough to meet its long-term obligations. A company with a high working capital ratio has more money available for short-term needs and less pressure on the balance sheet. A low working capital ratio indicates that a company has a lot of debt or sunk costs, which can make it difficult for the business to pursue new opportunities.

3. Price-to-earnings Ratio

The price-to-earnings ratio measures the price of a stock as compared to its earnings per share (EPS). By comparing the two ratios, we can get an idea of whether the stock is undervalued or overvalued at that time. The P/E ratio is calculated by dividing the market value of all outstanding shares by the EPS for the current year.

The P/E ratio indicates how far below or above the average price of a stock (its market value) will allow you to make money in the future. Investors use this ratio when examining potential investments; if a stock appears undervalued, it may be worth buying shares at a discount to its intrinsic value, assuming that the business has strong growth prospects ahead. Conversely, if a stock appears overvalued, it may be worth selling some or all of your shares in order to take advantage of rising prices and sell at a profit later on.

Quick Ratio

This is a ratio that measures liquidity, which means it measures the availability of cash in the business. To calculate this you need to divide the current assets by the current liabilities. The quick ratio can be used to determine if a company has enough cash on hand to pay its bills when they are due. A high value indicates that there is sufficient liquidity to meet short-term obligations. It is calculated as Total Current Assets divided by Current Liabilities. If the Quick Ratio is above 1, a company is generally in good shape. The quick ratio is the best way to measure a company’s ability to meet its short-term obligations. Even though this may sound complicated any financial calculator online could easily help you calculate it.

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