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📐 Financial Ratios Calculator

Enter financial statement inputs to calculate liquidity, leverage, profitability, and efficiency ratios instantly.

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Understanding Financial Ratios

Financial ratios provide quick insights into a company’s financial health by relating numbers from its balance sheet and income statement. They are used by investors, creditors, managers, and analysts to benchmark performance and risk.

1. Liquidity ratios

Liquidity ratios measure a company’s ability to cover short-term obligations. Common metrics include the current ratio (Current Assets ÷ Current Liabilities) and the quick ratio (liquid assets ÷ Current Liabilities).

2. Leverage ratios

Leverage ratios show how much a company relies on debt vs equity. The debt-to-equity ratio (Total Debt ÷ Total Equity) highlights financial structure and risk. A high ratio suggests greater leverage risk.

3. Profitability ratios

These ratios evaluate efficiency in generating profit. Net margin (Net Income ÷ Revenue) shows profit per dollar of sales. Return on assets (ROA) and return on equity (ROE) indicate effectiveness in using assets and equity.

4. Efficiency ratios

Efficiency ratios like asset turnover (Revenue ÷ Total Assets) measure how productively assets generate sales. Higher ratios suggest more efficient use of assets.

5. Example setup (continued in Part 2)

Suppose a company reports Current Assets = $50k, Current Liabilities = $30k, Debt = $80k, Equity = $120k, Net Income = $25k, Revenue = $100k, Total Assets = $200k. In Part 2, we’ll calculate its key ratios and interpret the results.

6. Worked example (continued)

Using the sample numbers: Current Assets = $50,000, Current Liabilities = $30,000, Debt = $80,000, Equity = $120,000, Net Income = $25,000, Revenue = $100,000, Assets = $200,000.

  • Current Ratio = 50,000 ÷ 30,000 = 1.67
  • Debt-to-Equity = 80,000 ÷ 120,000 = 0.67
  • Net Margin = 25,000 ÷ 100,000 = 25%
  • ROA = 25,000 ÷ 200,000 = 12.5%
  • ROE = 25,000 ÷ 120,000 = 20.8%
  • Asset Turnover = 100,000 ÷ 200,000 = 0.5

The company appears reasonably liquid, has moderate leverage, and solid profitability ratios compared to industry averages.

7. Limitations of ratios

Ratios must be compared to industry benchmarks and historical trends. They don’t capture qualitative factors like management quality or market position. Accounting differences can distort comparisons.

8. Application in decision making

Managers use ratios to monitor efficiency, creditors use them to assess default risk, and investors rely on them for valuation and portfolio decisions. They form part of fundamental analysis alongside cash flow and growth assessments.

9. Combining ratios for deeper insight

No single ratio tells the full story. A company may have high ROE due to heavy leverage. Looking at debt-to-equity alongside ROE clarifies whether profitability comes with extra risk.

10. Final takeaway

Financial ratios are powerful diagnostic tools but must be interpreted in context. Use them as indicators, not absolutes, and combine with other financial analysis methods.

Frequently Asked Questions (FAQs)

1. Which financial ratios are most important?
It depends on your objective. Liquidity ratios are key for creditors, profitability ratios for investors, and efficiency ratios for managers. Always use a combination.
2. How do I know if a ratio is “good”?
Compare ratios to industry peers and historical performance. A current ratio of 2 might be healthy in one industry but excessive in another.
3. Can ratios be used for startups?
Ratios are less meaningful for startups without stable revenues. Cash burn rate and runway are more useful in early stages.
4. Do ratios vary by industry?
Yes — capital-intensive industries often have higher leverage, while service businesses may show higher asset turnover. Always benchmark within the same industry.
5. What is a healthy debt-to-equity ratio?
It varies, but many analysts see 1.0 or below as conservative. Fast-growing firms may operate safely with higher ratios depending on cash flow stability.
6. How do financial ratios affect stock prices?
Ratios feed into valuation models and analyst reports. Strong profitability ratios often support higher stock prices, while weak liquidity ratios can deter investors.
7. Should I calculate ratios quarterly or annually?
Quarterly ratios provide timelier insights, while annual ratios smooth seasonal fluctuations. Use both for complete analysis.
8. Can I use ratios for personal finance?
Yes — debt-to-income and savings ratios are common personal finance equivalents. They help individuals monitor financial health.
9. Do ratios predict bankruptcy?
Certain models like the Altman Z-score use ratios to predict bankruptcy risk, but they are probabilities, not certainties.
10. How reliable are financial ratios?
They are only as reliable as the underlying financial statements. Audited reports give more credibility, while manipulated accounting reduces reliability.