Understanding financial ratios and metrics
Financial ratios and metrics are used to analyze and interpret financial statements, providing insights into a company’s performance, liquidity, solvency, and efficiency. Some key financial ratios and metrics include the following:
- Liquidity ratios: These calculations evaluate a company’s capacity to fulfill its short-term financial commitments. Widely used liquidity ratios consist of the current ratio (current assets/current liabilities) and the quick ratio (current assets – inventory/current liabilities).
- Profitability ratios: These metrics evaluate a business’s capacity to earn profits. Some examples are the gross profit margin (gross profit/revenue), operating margin (operating income/revenue), and net profit margin (net income/revenue).
- Solvency ratios: These metrics analyze a firm’s capacity to handle long-term commitments and maintain financial stability. Key solvency metrics include...
