Basic Financial Ratios and Their Meanings
Financial ratios are key tools used to assess a company's financial health and performance. They are calculated from data in financial statements and assist managers, investors, and analysts in decision-making processes. Here are some fundamental financial ratios and their meanings: 1. Profitability Ratios Net Profit Margin: Calculation: Net Profit / Net Sales Meaning: Indicates how much net profit the company makes from each unit of sales. A high net profit margin shows that the company is managing its costs well and increasing its profitability. Return on Equity (ROE): Calculation: Net Profit / Average Equity Meaning: Shows how much profit the company generates with the money shareholders have invested. A high ROE indicates that the company is using its equity efficiently. 2. Liquidity Ratios Current Ratio: Calculation: Current Assets / Current Liabilities Meaning: Measures whether a company has enough liquid assets to cover its short-term liabilities. Ideally, it should be abov...