Financial ratios are the greatest analysis tools for your investment. They help you measure the profitability, strength, quality, and efficiency of business from various angles. Besides, it also allows you to monitor the changes in the core operating metrics over time. Before using it, these financial ratio categories help you remember the essential ratios.
The financial ratio can give you investment opportunities and also the protection of your stocks, bonds, or real estate investment.
Leverage
There are ratios that tell you the inherent leverage in the business. These are the ratios that give you the knowledge about the company’s capital structure, together with its possible benefits and risks, like capital structure.
Other than that, these ratios also tell the capital structure of a company and also how it compares to its competitors in the same industry. The example of these ratios is the debt-to-equity ratio.
Liquidity
These ratios show the companies solvencies according to their assets against its liabilities, like the working capital per dollar of sales and the current ratio. It shows the available resources for a firm for paying its bills and pay the staff.
Liquidity is essential since the lack of it will cause even highly profitable businesses go bankrupt.
Profitability
This ratio will tell you how lucrative is a business. A company with high gross profit margins from a sustainable business will less likely go out of business when the economy is having a hard time. The example of this business is those producing bleach, chocolate, or laundry detergent.
Companies with high return capital will have a bigger chance to survive a bad economy, even with smaller margins.
Operating
It shows the efficiency of a company’s management and operation in using its capital. Especially, when using the cash conversion cycle to gain profit.
In the retail industry, it includes metrics like account receivable turnover and inventory turnover. Companies will have a franchise value if they successfully and consistently have strong financial ratios.
Solvency
The last category of financial ratios is solvency. It gives new investors the knowledge about the chances of a company being unable to cover its obligation whenever assets lost liabilities.
Low solvency ratios will put, even the most wonderful business in danger.
