Financial 

Statement Analysis ‐ Accounting Ratio 

Here are some common liquidity ratios used to assess a company's ability to meet its
short-term financial obligations:

Current Ratio: It is the ratio of current assets to current liabilities. It indicates a company's
ability to pay off its short-term liabilities using its short-term assets.

Quick Ratio: It is also known as the acid-test ratio, which measures a company's ability to pay
off its current liabilities using its most liquid assets, such as cash and cash equivalents,
marketable securities, and accounts receivable.

Cash Ratio: It is the ratio of a company's cash and cash equivalents to its current liabilities. It
measures the ability of a company to pay off its short-term liabilities using its cash reserves.

Operating Cash Flow Ratio: It is the ratio of a company's operating cash flow to its current
liabilities. It shows how well a company's cash flow from its core operations covers its short-
term debt obligations.

Receivables Turnover Ratio: It measures the number of times a company can collect its
accounts receivable during a particular period. It indicates how quickly a company can convert
its receivables into cash, which is an important factor in assessing its liquidity.

Inventory Turnover Ratio: It measures how many times a company can sell and replace its
inventory during a particular period. It indicates the efficiency of a company's inventory
management and how quickly it can convert its inventory into cash.

Debt-to-Equity Ratio: It is the ratio of a company's total debt to its shareholders' equity. It
measures how much of a company's assets are financed through debt compared to equity. A
higher ratio indicates a higher level of financial risk and may impact a company's liquidity.

Leverage ratios are financial ratios that measure a company's ability to meet its long-
term financial obligations and the level of debt a company has taken on to finance its
operations. Here are some common leverage ratios:

Debt-to-Equity Ratio: It measures a company's total debt relative to its equity. A higher debt-
to-equity ratio indicates that a company is relying more heavily on debt to finance its
operations, which can increase financial risk.

Debt-to-Asset Ratio: It measures a company's total debt relative to its total assets. A higher
debt-to-asset ratio indicates that a larger portion of a company's assets are financed through
debt, which can also increase financial risk.

Interest Coverage Ratio: It measures a company's ability to cover its interest expenses with
its earnings before interest and taxes (EBIT). A higher interest coverage ratio indicates that a
company is more capable of meeting its interest obligations.

Fixed Charge Coverage Ratio: It measures a company's ability to cover its fixed charges,
which includes both interest and other fixed expenses such as lease payments. A higher fixed
charge coverage ratio indicates that a company has more financial flexibility to cover its fixed
obligations.
Financial Statement Analysis ‐ Accounting Ratio 

Debt Service Coverage Ratio: It measures a company's ability to meet its debt obligations,
including both principal and interest payments. A higher debt service coverage ratio indicates
that a company has a better ability to meet its debt obligations.

These leverage ratios are important for investors and creditors as they provide insights into a
company's financial risk, ability to meet its debt obligations, and the level of debt used to
finance its operations.

Activity ratios, also known as efficiency ratios, are financial ratios that measure a
company's ability to efficiently manage its assets and generate revenue. Here are some
common activity ratios:

Inventory Turnover Ratio: It measures the number of times a company sells and replaces its
inventory during a particular period. A higher inventory turnover ratio indicates that a company
is selling its inventory more quickly, which can increase cash flow.

Accounts Receivable Turnover Ratio: It measures the number of times a company can collect
its accounts receivable during a particular period. A higher accounts receivable turnover ratio
indicates that a company is collecting its receivables more quickly, which can improve cash
flow.

Accounts Payable Turnover Ratio: It measures the number of times a company pays its
accounts payable during a particular period. A higher accounts payable turnover ratio indicates
that a company is paying its bills more quickly, which can improve its relationships with
suppliers.

Fixed Asset Turnover Ratio: It measures the efficiency of a company's use of its fixed assets,
such as property, plant, and equipment, in generating revenue. A higher fixed asset turnover
ratio indicates that a company is generating more revenue from its fixed assets.

Total Asset Turnover Ratio: It measures a company's ability to generate revenue relative to
its total assets. A higher total asset turnover ratio indicates that a company is generating more
revenue from its assets, which can indicate efficient use of resources.

These activity ratios are important for investors and creditors as they provide insights into a
company's operational efficiency and ability to generate revenue from its assets.

Profitability ratios are financial ratios that measure a company's ability to generate
profits relative to its revenue, assets, or equity. Here are some common profitability
ratios:

Gross Profit Margin: It measures the percentage of revenue that remains after deducting the
cost of goods sold. A higher gross profit margin indicates that a company is able to sell its
products or services at a higher mark up.

Operating Profit Margin: It measures the percentage of revenue that remains after deducting
the cost of goods sold and operating expenses. A higher operating profit margin indicates that
a company is able to generate profits from its core operations.
Financial Statement Analysis ‐ Accounting Ratio 

Net Profit Margin: It measures the percentage of revenue that remains after deducting all
expenses, including taxes and interest. A higher net profit margin indicates that a company is
able to generate profits after all expenses are accounted for.

Return on Assets (ROA): It measures a company's ability to generate profits relative to its total
assets. A higher ROA indicates that a company is generating more profits from its assets.

Return on Equity (ROE): It measures a company's ability to generate profits relative to its
shareholders' equity. A higher ROE indicates that a company is generating more profits
relative to its equity.

Return on Investment (ROI): It measures the return on an investment relative to its cost. A
higher ROI indicates that an investment is generating more profits relative to its cost.

These profitability ratios are important for investors and creditors as they provide insights into
a company's ability to generate profits from its operations, assets, and equity.

Market ratios, also known as valuation ratios, are financial ratios that measure a
company's market value relative to its earnings, book value, or other financial metrics.
Here are some common market ratios:

Price-to-Earnings (P/E) Ratio: It measures a company's current stock price relative to its
earnings per share (EPS) over the last 12 months. A higher P/E ratio indicates that investors
are willing to pay more for each dollar of earnings.

Price-to-Book (P/B) Ratio: It measures a company's current stock price relative to its book
value per share. A higher P/B ratio indicates that investors are willing to pay more for each
dollar of the company's net assets.

Price-to-Sales (P/S) Ratio: It measures a company's current stock price relative to its revenue
per share. A higher P/S ratio indicates that investors are willing to pay more for each dollar of
the company's revenue.

Dividend Yield: It measures the annual dividend pay-out per share relative to the stock price.
A higher dividend yield indicates that a company is paying out a higher percentage of its profits
as dividends.

Earnings per Share (EPS): It measures the amount of earnings per share of stock. A higher
EPS indicates that a company is generating more profits per share of stock.

Market Capitalization: It measures the total value of a company's outstanding shares of stock.
Market capitalization is calculated by multiplying the stock price by the number of outstanding
shares.

These market ratios are important for investors and analysts as they provide insights into a
company's market value and potential for future growth. They are often used in combination
with other financial ratios to evaluate a company's overall financial performance.
Financial Statement Analysis ‐ Accounting Ratio 

Valuation ratios, also known as price ratios, are financial ratios that measure the
relationship between a company's stock price and its financial performance. These
ratios help investors and analysts evaluate whether a stock is overvalued or
undervalued. Here are some common valuation ratios:

Price-to-Earnings (P/E) Ratio: It measures a company's current stock price relative to its
earnings per share (EPS) over the last 12 months. A higher P/E ratio indicates that investors
are willing to pay more for each dollar of earnings.

Price-to-Book (P/B) Ratio: It measures a company's current stock price relative to its book
value per share. A higher P/B ratio indicates that investors are willing to pay more for each
dollar of the company's net assets.

Price-to-Sales (P/S) Ratio: It measures a company's current stock price relative to its revenue
per share. A higher P/S ratio indicates that investors are willing to pay more for each dollar of
the company's revenue.

Price-to-Cash Flow (P/CF) Ratio: It measures a company's current stock price relative to its
cash flow per share. A higher P/CF ratio indicates that investors are willing to pay more for
each dollar of the company's cash flow.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: It measures a company's enterprise value

(market value of equity plus debt) relative to its earnings before interest, taxes, depreciation,
and amortization (EBITDA). A lower EV/EBITDA ratio indicates that a company may be
undervalued.

These valuation ratios are important for investors and analysts as they provide insights into a
company's market value and potential for future growth. They are often used in combination
with other financial ratios to evaluate a company's overall financial performance.

EVA (Economic Value Added) is a financial metric that measures a company's true
economic profit by deducting the cost of capital from its net operating profit after tax
(NOPAT). EVA is a popular financial ratio used to determine the value created by a
company's operations after taking into account the cost of capital used to fund those
operations. Here are some similar financial ratios:

MVA (Market Value Added): It measures the difference between a company's market value
and the amount of capital that has been invested in the company. MVA can be used to
evaluate how much value a company has created for its shareholders.

CVA (Cash Value Added): It measures a company's cash flow relative to the cost of capital.
CVA can be used to evaluate how much cash a company has generated in excess of the cost
of capital.

FCF (Free Cash Flow): It measures the amount of cash that a company generates from its
operations after deducting capital expenditures. FCF can be used to evaluate a company's
ability to generate cash flow from its operations.
Financial Statement Analysis ‐ Accounting Ratio 

ROIC (Return on Invested Capital): It measures a company's return on the capital that has
been invested in the business. ROIC can be used to evaluate how efficiently a company is
using its capital to generate returns.

These financial ratios are important for investors and analysts as they provide insights into a
company's financial performance, profitability, and value creation. They are often used in
combination with other financial ratios to evaluate a company's overall financial health and
potential for future growth.