Financial ratios are important tools that help us understand how well a company is doing. They give us a peek into its financial health, how efficiently it runs, and how much profit it makes. This information helps investors, lenders, and managers make smart choices based on real numbers.

Key Types of Financial Ratios

1. Liquidity Ratios:

   • Current Ratio: This shows if a company can pay its short-term bills with its short-term assets. Here’s the formula:
     $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$
     If the current ratio is more than 1, it means the company can cover its short-term obligations.

2. Profitability Ratios:

   • Net Profit Margin: This measures how good a company is at turning its sales into profit. The formula is:
     $\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Revenue}} \times 100$
     For example, if the net profit margin is 20%, the company makes $0.20 in profit for every dollar it earns.

3. Leverage Ratios:

   • Debt to Equity Ratio: This shows how much debt a company has compared to its equity (the money invested by shareholders). The formula is:
     $\text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}}$
     If this ratio is above 1, it might mean that the company is relying too much on debt.

Performance Indicators

• Return on Assets (ROA):
  This tells us how well a company uses its assets to make profit. The formula is:
  $\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100$
  A higher ROA means the company is managing its assets well.

• Return on Equity (ROE):
  This shows how much profit a company makes from the money shareholders have invested. The formula is:
  $\text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \times 100$
  An ROE of 15% means that for every dollar invested, the company gives back $0.15 in profit.

In conclusion, financial ratios give us important and simple numbers to understand how a company is doing. They help us see how a company stacks up against others in the industry, making it easier for stakeholders to evaluate performance.