A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's

Stock Valuation Metrics

{{Authority control Financial ratios,

financial statement
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...

s. Often used in accounting
Accounting or Accountancy is the measurement
'
Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...

, there are many standard ratio
In mathematics, a ratio indicates how many times one number contains another. For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8∶6, which is equivalent to ...

s used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholder
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...

s (owners) of a firm, and by a firm's creditor
A creditor or lender is a party
300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark
A party is a gathering of people who have been invited by a host
A host is ...

s. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Ratios can be expressed as a Decimal separator, decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its Reciprocal (mathematics), reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.
Sources of data

Values used in calculating financial ratios are taken from the balance sheet, income statement, statement of cash flows or (sometimes) the statement of changes in equity. These comprise the firm's "accounting statements" or financial statements. The statements' data is based on the accounting method and accounting standards used by the organisation.Purpose and types

Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets.Groppelli, p. 436. Debt ratios measure the firm's ability to repay long-term debt.Groppelli, p. 439. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.Groppelli, p. 445. These are concerned with the return on investment forshareholder
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...

s, and with the relationship between return and the value of an investment in company's shares.
Financial ratios allow for comparisons
* between companies
* between industries
* between different time periods for one company
* between a single company and its industry average
Ratios generally are not useful unless they are Benchmarking, benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition are usually hard to compare.
Accounting methods and principles

Financial ratios may not be directly comparable between companies that use different accounting methods or follow various standard accounting practices. Most public company, public companies are required by law to use generally accepted accounting principles for their home countries, but private company, private companies, partnerships and sole proprietorships may elect to not use accrual basis accounting. Large multi-national corporations may use International Financial Reporting Standards to produce their financial statements, or they may use the generally accepted accounting principles of their home country. There is no international standard for calculating the summary data presented in all financial statements, and the terminology is not always consistent between companies, industries, countries and time periods.Abbreviations and terminology

Various abbreviations may be used in financial statements, especially financial statements summarized on the Internet. Sales (accounting), Sales reported by a firm are usually net sales, which deduct returns, allowances, and early payment discounts from the charge on an invoice. Net income is always the amount ''after'' taxes, depreciation, amortization, and interest, unless otherwise stated. Otherwise, the amount would be EBIT, or EBITDA (see below). Companies that are primarily involved in providing services with labour do not generally report "Sales" based on hours. These companies tend to report "revenue" based on the monetary value of income that the services provide. Note that Shareholders' Equity and Owner's Equity are ''not'' the same thing, Shareholder's Equity represents the total number of shares in the company multiplied by each share's book value; Owner's Equity represents the total number of shares that an individual shareholder owns (usually the owner with controlling interest), multiplied by each share's book value. It is important to make this distinction when calculating ratios.Abbreviations

(''Note: '' These are not ratios, but values in currency.) * Cost of goods sold, COGS = Cost of goods sold, or cost of sales. * Earnings before interest and taxes, EBIT = Net income, Earnings before interest and taxes * EBITDA = Earnings before interest, taxes, depreciation, and amortization * Earnings per share, EPS = Earnings per shareRatios

Profitability ratios

Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return :;Gross margin, Gross profit margin or Gross Profit RateWilliams, p. 1094. :::$\backslash frac$ :::OR :::$\backslash frac$ ---- :;Operating margin, Operating Income Margin, Operating profit margin or Return on sales (ROS) :::$\backslash frac$ :Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit. This is true if the firm has no non-operating income. (Earnings before interest and taxes / Sales) ---- :;Profit margin, net margin or net profit marginGroppelli, p. 444. :::$\backslash frac$ ---- :;Return on equity (ROE) :::$\backslash frac$ ---- :;Return on assets (ROA ratio or Du Pont Ratio) :::$\backslash frac$ ---- :;Return on assets (ROA) :::$\backslash frac$ ---- :;Return on assets Du Pont (ROA Du Pont) :::$\backslash left(\backslash frac\backslash right)\backslash left(\backslash frac\backslash right)$ ---- :;Return on Equity Du Pont (ROE Du Pont) :::$\backslash left(\backslash frac\backslash right)\backslash left(\backslash frac\backslash right)\backslash left(\backslash frac\backslash right)$ ---- :;Return on net assets (RONA) :::$\backslash frac$ ---- :;Return on capital (ROC) :::$\backslash frac$ ---- :;Risk adjusted return on capital (RAROC) :::$\backslash frac$ :::OR :::$\backslash frac$ ---- :;Return on capital employed (ROCE) :::$\backslash frac$ :::Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity ---- :;Cash flow return on investment (CFROI) :::$\backslash frac$ ---- :;Efficiency ratio :::$\backslash frac$ ---- :;Net gearing :::$\backslash frac$ ---- :;Basic Earnings Power Ratio :::$\backslash frac$ ---- ----Liquidity ratios

Accounting liquidity, Liquidity ratios measure the availability of cash to pay debt. :;Current ratio, Current ratio (Working Capital Ratio)Groppelli, p. 435. :::$\backslash frac$ ---- :;Quick ratio, Acid-test ratio (Quick ratio) :::$\backslash frac$ ---- :;Cash ratio :::$\backslash frac$ ---- :;Operating cash flow ratio :::$\backslash frac$ ----Activity ratios (Efficiency Ratios)

Activity ratios measure the effectiveness of the firm's use of resources. :;Debtor collection period, Average collection period :::$\backslash frac$ :;Operating leverage#DOL and Operating income, Degree of Operating Leverage (DOL) :::$\backslash frac$ :;DSO Ratio. :::$\backslash frac$ :;Average payment period :::$\backslash frac$ :;Asset turnover :::$\backslash frac$ :;Stock turnover ratio :::$\backslash frac$ :;Receivables Turnover Ratio :::$\backslash frac$ :;Inventory conversion ratio :::$\backslash frac$ :;Inventory conversion period (essentially same thing as above) :::$\backslash left\; (\backslash frac\backslash right)\backslash mbox$ :;Receivables conversion period :::$\backslash left\; (\backslash frac\backslash right)\backslash mbox$ :;Payables conversion period :::$\backslash left\; (\backslash frac\backslash right)\backslash mbox$ :;Cash conversion cycle, Cash Conversion Cycle :::$\backslash mbox$Debt ratios (leveraging ratios)

Debt ratios quantify the firm's ability to repay long-term debt. Debt ratios measure leverage (finance), financial leverage. :;Debt ratio :::$\backslash frac$ :;Debt to equity ratioGroppelli, p. 441. :::$\backslash frac$ :;Long-term Debt to equity (LT Debt to Equity) :::$\backslash frac$ :;Times interest earned, Times interest earned ratio (Interest Coverage Ratio) :::$\backslash frac$ :::OR :::$\backslash frac$ :;Debt service coverage ratio :::$\backslash frac$Market ratios

Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company's shares. :;Earnings per share (EPS) :::$\backslash frac$ :;Payout ratioGroppelli, p. 446.Groppelli, p. 449. :::$\backslash frac$ :::OR :::$\backslash frac$ :;Dividend cover (the inverse of Payout Ratio) :::$\backslash frac$ :;PE ratio, P/E ratio :::$\backslash frac$ :;Dividend yield :::$\backslash frac$ :;Cash flow ratio or Price/cash flow ratioGroppelli, p. 447. :::$\backslash frac$ :;P/B ratio, Price to book value ratio (P/B or PBV) :::$\backslash frac$ :;Price/sales ratio :::$\backslash frac$ :;PEG ratio :::$\backslash frac$ Other Market Ratios :;EV/EBITDA :::$\backslash frac$ :;EV/Sales :::$\backslash frac$ :;Cost/Income ratio Sector-specific ratios :;EV/capacity :;EV/outputCapital budgeting ratios

In addition to assisting management and owners in diagnosing the financial health of their company, ratios can also help managers make decisions about investments or projects that the company is considering to take, such as acquisitions, or expansion. Many formal methods are used in capital budgeting, including the techniques such as * Net present value * Profitability index * Internal rate of return * Modified internal rate of return * Equivalent annual cost, Equivalent annuitySee also

* List of financial performance measures * Greeks (finance)References

External links

Stock Valuation Metrics

{{Authority control Financial ratios,