Financial Ratios: Overview

Types of Ratios

Capital allocation ratios

Capital allocation ratios show how a company’s management allocates its resources to generate a profit.

Liquidity ratios

Liquidity ratios measure the short-term ability of a company to cover its maturing obligations, as well as unexpected needs for cash.

Solvency ratios

Solvency ratios measure a company’s ability to survive in the long run.

Profitability ratios

Profitability ratios give an idea about a company’s ability to generate a profit or operating success.

Valuation ratios

Valuation ratios are used to value companies based on relative valuation.

Pure vs. mixed ratios

Pure financial ratios consist purely of numbers that cover either a time period (income statement, cash flow statement) or point in time (balance sheet).

Mixed financial ratios consist of numbers covering both a time period (income statement, cash flow statement) and a point in time (balance sheet). To make the numbers compatible, the balance sheet numbers of the current and previous period get averaged.

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