• Most Important Financial Ratios

    The Most Important Financial Ratios for New Investors

  • Financial Ratios

    In case you have made a decision about to invest in individual stocks, you must have knowledge about how to calculate the financial ratios. If you going to take information about stock from your broker or from a website, you still need to learn about how it works. These ratios will let you know about the position of company stock in which you are going to invest. If you ignore this, you may lead toward the risk of buying the stock of a company with a huge amount of debt, the uncertainty of risk, low profitability, and minimum cash for its survival.

    The Most Important Financial Ratios for New Investors

    If you are a new investor, and you want to invest in the stock of the company, then you must learn below the most important ratio to analyze the company performance:

    Price to Cash Flow Ratio: is the profitability ratio that used to compare the company’s stock price with underlying cash flow. The sole purpose of this ratio is to find out the total worth of the company with the help of the total amount of cash flow generated by the business.

    As its name shows this ratio only calculate cash item and ignore all the non-cash items. With it you can make a comparison with the market value in order to demonstrate either the valuation is justified or not.

    Price to Earnings Ratio - The P/E Ratio: this is the most useful ratio for the investor, which is the easiest way to find out about how much the how "cheap" or "expensive" the company stock is. With the help of this ratio, the investor can make an analysis about how much he should pay for the stock on the basis of its every single $ earning.

     

    The PEG Ratio: is a short form of a price-to-earnings-to-growth ratio, also known as p/e ratio. This is the most valuable ratio for calculation and valuation of two stock. As its name shows that this ratio tells us about the growth of the company.

    Asset Turnover Ratio: help the new investor to calculate the total sale of the company against every single dollar of asset. It tells us about how the company is efficient by using its current and fixed assets.

    Current Ratio: is the most important ratio among all other financial ratios. If you have command on this ratio, then you can test any company’s strength and its efficiency. By this, you can know how much cash on hand is available with the company.

    Debt to Equity Ratio: Another most important ratio, used to the total worth of the company to its total obligations.

    Net Profit Margin Ratio: It tells the investor about how much company makes money for each single $ in revenue. The companies with higher profit margin are able to provide incentives, bonus and fatter dividend to its stockholder.

    Other most important ratios that you learn as under:

    • Interest Coverage Ratio
    • Inventory Turnover Ratio
    • Net Profit Margin Ratio
    • Operating Profit Margin Ratio
    • Quick Test Ratio
    • Receivable Turns
    • Return on Assets (ROA) Ratio
    • Return on Equity (ROE) Ratio
    • Advanced Return on Equity: The DuPont Model

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  • Ratios For Creditors

    Financial Ratios Important to Creditors

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    Financial Ratios For creditors

    Why are financial ratios important to creditors?

    Financial ratios analysis are the major factor of comparing or checking the financial condition of the businesses in the same industry. As a creditor you need financial ratios to make the comparison the customer business and make decision about the future credit transaction with that business that whether to extend credit to customers, how much amount of credit to extend, and what are appropriate terms and condition of sale.

    As a credit professional you can use the following Financial Ratios to check the performance of the customers’ business, to find the potential risk and other threats that should be scrutinized by the credit manager.

    Liquidity Ratios: Liquidity ratio tells us about how much easily business can convert its current assets into cash. Laterally in business term the liquidity means how much the company is capable of paying its debt and able to meets its current liability with cash and easily convert the assets into cash. Liquidity Ratios consist of Current Ratio and Quick Ratio.

    Current ratio formula is total current asset / current liability.

    Quick ratio formula is (Current assets less inventories)

    Leverage Ratios: tells us about how much contribution of the stockholders and creditors in the business. By Leverage Ratio you can come to know that how much business is relying on debt financing or equity financing, and to which extent the debt is used in capital structure of the business. Leverage contains Debt to equity ratio and The Interest Coverage Ratio.

    Debt to Equity ratio formula: Total liabilities divided by total equity.

    The interest coverage ratio formula: Earnings before Interest, Taxes, Depreciation and Amortization divided by Interest Expense.

    Profitability ratios: Profitability ratio use to evaluate and examine the ability of the company in order to generate the income against cost associated with generation of revenue. Profitability further categorized into following:

    • Gross profit margin
    • Return on sales
    • The return on assets
    • return on equity
    • return on assets

    Efficiency ratios: Tells us about how much the business is efficient in using of assets to generate the sales and profit.

    Enlist below some ratios included in Efficiency ratio:

    • Payables turnover ratio
    • Inventory turnover ratio
    • The Return on assets (ROA) ratio
    • Asset turnover.
    There are other so many ratios available each one of them with special purpose. you can find the all from financialratio.info, the special site for financial ratios.
  • Importance of Financial Ratios

    Importance of Financial Ratios

    Financial Ratios:
    Financial Ratios are key indicators of the financial performance of the company and are usually derived from its three statements including income statement, balance sheet, and cash flows. These financial ratios help in analyzing the company's profitability, liquidity, assumed risks as well as financial stability.
    Financial ratios are the tools for measuring the performance of a company and to determine the financial position through profitability, liquidity, and other related indicators.

    Ratio analysis may be a quantitative technique of gaining insight into a company's liquidity, operational efficiency, and profit by examination data contained in its monetary statements. Ratio the analysis is a cornerstone of fundamental analysis.
    Importance of financial ratios for business concerns:
    For any organization, whether small, medium or large enterprises, it is important that management and
    stakeholders know its strengths and weaknesses. Management needs to know how the company has been

     

    performing over an amount of your time, and what its status is at any given point in time.

     

    Are they meeting their goals? What changes should make in operations?

    Financial Ratios offer the answers to any or all these queries.

    There are several numbers of financial ratios.
    Any set of numbers can be compared to another set of numbers. However, all of them are not required.
    Only those ratios need to be chosen that are applicable to the respective business.
    Key financial ratios that a business should know i.e operating margins, return on equity, return on asset,
    quick ratio, current ratio, debt-equity ratio, inventory turn over ratio, etc. Financial ratios quantify many

     

    aspects of a business associated ar an integral a part of the analysis of the finance.

     

    Financial quantitative relations are categorized per the monetary side of the business that the ratio measures.

    Liquidity ratios measure the provision of money to pay the debt. Activity ratios measure how quickly a firm converts non-cash assets to money assets.

    Debt ratios measure the firm's ability to repay long-term debt. Profitability ratios live the firm's use of its assets and management of its expenses to generate an acceptable rate of return. Market ratios live the capitalist response to owning a company's stock and conjointly the value of supplying stock. These are concerned with the return on investment for shareholders associated with the connection between come and also the worth of an investment in the company's shares. These financial ratios help in analyzing the performance trends over a long period of time and also help
    to compare business financial results to competitors. Financial ratios assist the management in
    decision making and to point out the problem and weak areas along with strength areas.

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