Types of Ratios

Capital allocation ratios

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

• R&D to Sales Ratio
• CapEx to Sales Ratio

Liquidity ratios

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

• Accounts Receivable Turnover
• Average Collection Period
• Current Ratio
• Days in Inventory
• Inventory Turnover
• Quick Ratio (Acid-Test)
• Working Capital

Solvency ratios

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

• Assets to Equity Ratio
• Debt to Assets Ratio
• Debt to Equity Ratio
• Free Cash Flow
• Times Interest Earned

Profitability ratios

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

• Asset Turnover
• Earnings Per Share (EPS)
• Free Cash Flow to Sales Ratio
• Gross Profit Margin
• Net Margin
• Payout Ratio
• Return on Equity (ROE)

Valuation ratios

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

• Free Cash Flow Yield
• Price-Earnings Ratio

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.