When looking at financial statements, it’s important to understand some key ratios. Here are the ones you should know:

1. Liquidity Ratios:

   • Current Ratio: This shows if a company can pay its short-term debts. It is calculated by dividing current assets by current liabilities.
   • Quick Ratio: This is a stricter test. It looks at current assets but leaves out inventory. You calculate it by taking current assets, subtracting inventory, and then dividing by current liabilities.

2. Profitability Ratios:

   • Net Profit Margin: This tells you how much profit a company makes for every dollar it sells. It’s found by dividing net income by revenue.
   • Return on Equity (ROE): This measures how well a company makes money compared to what the shareholders have invested. It is calculated by dividing net income by shareholders' equity.

3. Leverage Ratios:

   • Debt-to-Equity Ratio: This shows the amount of debt a company has compared to its equity. You compute it by dividing total debt by shareholders’ equity.

Knowing these ratios can help you understand how a company is doing. They can also guide you in making smart investment choices!