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When it comes to evaluating a company's financial health, there are several key ratios that investors and analysts use to assess its performance. These ratios provide valuable insights into a company's profitability, liquidity, efficiency, and solvency. By understanding and analyzing these ratios, you can make more informed investment decisions and better understand the financial health of a company.
Profitability ratios measure a company's ability to generate profits relative to its revenue, assets, and equity. Here are some important profitability ratios to consider:
| Ratio | Formula | Description |
|---|---|---|
| Gross Profit Margin | (Gross Profit / Revenue) x 100 | Measures the percentage of revenue that exceeds the cost of goods sold. |
| Net Profit Margin | (Net Income / Revenue) x 100 | Measures the percentage of revenue that remains as profit after all expenses are deducted. |
Liquidity ratios measure a company's ability to meet its short-term obligations. These ratios indicate whether a company has enough liquid assets to cover its current liabilities. Here are some important liquidity ratios to consider:
| Ratio | Formula | Description |
|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | Measures a company's ability to pay its short-term liabilities with its short-term assets. |
| Quick Ratio | (Current Assets - Inventory) / Current Liabilities | Measures a company's ability to pay its short-term liabilities without relying on the sale of inventory. |
Efficiency ratios measure how effectively a company utilizes its assets and liabilities to generate revenue. These ratios provide insights into a company's operational efficiency and productivity. Here are some important efficiency ratios to consider:
| Ratio | Formula | Description |
|---|---|---|
| Asset Turnover Ratio | Revenue / Average Total Assets | Measures how efficiently a company uses its assets to generate revenue. |
| Inventory Turnover Ratio | Cost of Goods Sold / Average Inventory | Measures how many times a company sells and replaces its inventory within a period. |
By analyzing these key ratios, you can gain valuable insights into a company's financial health and make more informed investment decisions. Remember that no single ratio can provide a complete picture of a company's financial performance, so it's important to consider a combination of ratios to get a comprehensive view.