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Key Financial Ratios
Understanding key financial ratios is essential for analyzing a company’s financial health and making informed decisions.
- Liquidity ratios reveal whether the company can meet short-term obligations and if its Net Working Capital is adequate.
- Efficiency ratios evaluate how well resources are used to generate output.
- Profitability ratios determine the company’s overall returns and profitability levels.
- Bank ratios help assess the company’s ability to secure debt financing.
- Valuation ratios compare valuation metrics like Sales or EBITDA to peers for easier company comparison.
These ratios provide quick insights into financial stability and performance, supporting better strategic actions.
Categories of Financial Ratios
Financial analysis uses the interpretation of important Key Financial Ratios to understand a company’s financial situation.
We can group those ratios in several categories:
- Liquidity ratios – help to understand whether the company can honor its obligations in the short term and if the level of Net Working Capital is sufficient
- Efficiency ratios – focus on the efficiency of the allocated resources in terms of input/output
- Profitability ratios – determine the company’s returns
- Bank ratios – assess the company’s ability to obtain debt financing
- Valuation ratios – compare the company’s valuation in relation to e.g. Sales, EBITDA etc. to make it easier to compare the company’s valuation to similar companies
Below we have summarized the most useful financial ratios in form of a pocket card.
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