Financial RatiosFinancial Ratios give you an insight of a company and allow you to find great investment opportunities. There are a variety of different ratios and they can be broken down into five categories. The categories are 1. Liquidity Ratios which give you some insight on the firm’s ability to meet its immediate short term financial obligations. For instance the current ratio tells you how much assets does a company have when compared to its liabilities. The Quick ratio and Cash ratio are also considered to be in this group. 2. Efficiency Ratios or asset turnover ratios give you an understanding of how effective a company is using their current assets. Receivable turnover, average collection period and inventory turnover are all different types of efficiency rations. 3. Financial Leverage ratios give you the longer term outlook on a company’s ability to meet its financial obligations. The debt ratio, debt to equity ratio, and interest coverage ratio are all types of financial leverage ratios. 4. Profitability Ratios measure a company’s ability to generate earnings when it is compared to its expenses. Gross profit margin, Return on assets, and Return on equity are all forms of profitability ratios. 5. Dividend Ratios give you an insight on a company’s dividend policy and how it will change as situations change. Two major examples of this are the Dividend Yield ratio and the Payout ratio. Financial ratios can be used to help determine which company provides a terrific investment opportunity for the long term.
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