Key ratio
Key ratio is any financial ratio used to evaluate the financial performance, health and growth prospects of a business or a project. The selected ratios may vary, depending on the nature and industry of the endeavor.
Investors commonly use a selection of various financial ratios to evaluate the performance and liquidity of a company, thus allowing them to obtain a more insightful opinion on the value of the company.
Key ratios also allow investors to compare companies with one another. Financial ratios are calculated, based on the information provided in the company’s financial statements, such as:
- Balance sheet
- Income statement
- Cash flow statement
Data provided in these statements allow investors to perform quantitative analysis – a technique that uses mathematical and statistical modeling, measurement, and research to understand behavior.
Financial ratios are used to examine the following aspects of financial performance:
- Liquidity
The most popular ratio for estimating the liquidity of a company is the current ratio .This measures a company’s ability to pay off short-term liabilities with current assets.
- Leverage
The most popular ratio for estimating the company’s ability to meet its debt obligations is the debt ratio. This ratio measures the relative amount of a company’s assets that can be used to instantaneously cover the company’s debt obligations.
- Efficiency
The most popular ratio used to estimate the efficiency of a company is its asset turnover ratio. This ratio measures a company’s ability to use its assets as efficiently as possible for generating sales.
- Profitability
Among the most used ratios for calculating a company’s profitability is the gross margin ratio. It allows us to examine the tightness of the margin on which the company operates and how much it actually earns as a percentage of its sales, after it has paid for all of the raw materials used for the production of the goods.
- Market value
The most used ratio to estimate the fairness of the company’s market value is the book value per share ratio. It calculates the per-share value of a company.
