Understanding important financial ratios is very important for anyone studying business. They help us see how well a company is doing and how healthy its finances are. Here are some key ratios you should know:
Current Ratio: This shows if a company can pay its short-term debts. You find it by using this formula:
Current Ratio = Current Assets / Current Liabilities
If the ratio is more than 1, it means the company can pay its bills. If it’s less than 1, the company might have some problems paying its debts.
Debt to Equity Ratio: This helps us understand how much a company depends on borrowed money compared to what the owners have invested. You calculate it like this:
Debt to Equity Ratio = Total Liabilities / Shareholders' Equity
A low ratio means the company relies more on its own money than on debt, which is usually safer.
Gross Profit Margin: This shows how much money a company makes compared to what it spends on making its products. Here’s how to calculate it:
Gross Profit Margin = (Gross Profit / Revenue) × 100
A high margin means the company is good at making and selling its products at a profit.
Return on Equity (ROE): This tells us how well a company is using its shareholders' money to make a profit. You find it using this formula:
ROE = (Net Income / Shareholders' Equity) × 100
A high ROE means the company is doing a great job at making money for its owners.
Price to Earnings Ratio (P/E): This indicates how much investors are willing to pay for each dollar of the company’s earnings. It is calculated like this:
P/E Ratio = Market Price per Share / Earnings per Share
A higher P/E ratio may mean that investors think the company will grow in the future.
Knowing these ratios helps you understand financial statements and gives you useful tools for making smart business choices.
Understanding important financial ratios is very important for anyone studying business. They help us see how well a company is doing and how healthy its finances are. Here are some key ratios you should know:
Current Ratio: This shows if a company can pay its short-term debts. You find it by using this formula:
Current Ratio = Current Assets / Current Liabilities
If the ratio is more than 1, it means the company can pay its bills. If it’s less than 1, the company might have some problems paying its debts.
Debt to Equity Ratio: This helps us understand how much a company depends on borrowed money compared to what the owners have invested. You calculate it like this:
Debt to Equity Ratio = Total Liabilities / Shareholders' Equity
A low ratio means the company relies more on its own money than on debt, which is usually safer.
Gross Profit Margin: This shows how much money a company makes compared to what it spends on making its products. Here’s how to calculate it:
Gross Profit Margin = (Gross Profit / Revenue) × 100
A high margin means the company is good at making and selling its products at a profit.
Return on Equity (ROE): This tells us how well a company is using its shareholders' money to make a profit. You find it using this formula:
ROE = (Net Income / Shareholders' Equity) × 100
A high ROE means the company is doing a great job at making money for its owners.
Price to Earnings Ratio (P/E): This indicates how much investors are willing to pay for each dollar of the company’s earnings. It is calculated like this:
P/E Ratio = Market Price per Share / Earnings per Share
A higher P/E ratio may mean that investors think the company will grow in the future.
Knowing these ratios helps you understand financial statements and gives you useful tools for making smart business choices.