What are good financial ratios?
5 Essential Financial Ratios for Every Business. The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.
Key Takeaways
Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.
- Gross Profit Ratio.
- Operating Ratio.
- Operating Profit Ratio.
- Net Profit Ratio.
- Return on Investment (ROI)
- Return on Net Worth.
- Earnings per share.
- Book Value per share.
The total-debt-to-total-assets ratio is used to determine how much of a company is financed by debt rather than shareholder equity. A smaller percentage is better because it means that a company carries less debt compared to its total assets. The greater the percentage of assets, the better a company's solvency.
Financial ratio analysis is often broken into six different types: profitability, solvency, liquidity, turnover, coverage, and market prospects ratios. Other non-financial metrics may be scattered across various departments and industries.
- Price-Earnings Ratio (PE) This number tells you how many years worth of profits you're paying for a stock. ...
- Price/Earnings Growth (PEG) Ratio. ...
- Price-to-Sales (PS) ...
- Price/Cash Flow FLOW +5.6% (PCF) ...
- Price-To-Book Value (PBV) ...
- Debt-to-Equity Ratio. ...
- Return On Equity (ROE) ...
- Return On Assets (ROA)
The main solvency ratios are the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio.
Gross profit margin, also known as gross margin, is one of the most widely used profitability ratios. Gross profit is the difference between sales revenue and the costs related to the products sold, the aforementioned COGS.
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
Debt-to-equity ratio is used by bankers to see how your assets are financed, whether it comes from creditors or your own investments, for example. In general, a bank will consider a lower ratio to be a good indicator of your ability to repay your debts or take on additional debt to support new opportunities.
Which financial ratios should be high or low?
In general, a high EPS ratio is better than a low one. The higher your earnings per share ratio, the more profitable your company is. A higher EPS indicates a higher company value because it has more profits than expected relative to its share price.
- profitability ratios.
- liquidity ratios.
- operating efficiency ratios.
- leverage ratios.
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good.
A deteriorating profit margin, a growing debt-to-equity ratio, and an increasing P/E may all be red flags.
Common ratios used are the net interest margin, the loan-to-assets ratio, and the return-on-assets (ROA) ratio. Net interest margin is used to analyze a bank's net profit on interest-earning assets like loans, while the return-on-assets ratio shows the per-dollar profit a bank earns on its assets.
Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation to their investment cost. It is most commonly measured as net income divided by the original capital cost of the investment. The higher the ratio, the greater the benefit earned.
For interest coverage ratios: seek a score of 1.5 or higher—anything below suggests that you might struggle to meet your interest obligations. For debt-to-asset ratios: go as low as possible, preferably between . 3 and . 6; a score of 1.0 means your assets are equal to your debts.
In short, a “good” liquidity ratio is anything higher than 1. Having said that, a liquidity ratio of 1 is unlikely to prove that your business is worthy of investment. Generally speaking, creditors and investors will look for an accounting liquidity ratio of around 2 or 3.
Lower the Debt Equity ratio higher is the protection to creditors. Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money.
What is the P&L ratio formula?
The profit/loss ratio is the average profit on winning trades divided by the average loss on losing trades over a specified time period.
While there are several types of profit margin, the most significant and commonly used is net profit margin, which is based on a company's bottom line after all other expenses, including taxes, have been accounted for.
On the face of it, a gross profit margin ratio of 50 to 70% would be considered healthy, and it would be for many types of businesses, like retailers, restaurants, manufacturers and other producers of goods.
Net profit margins vary by industry but according to the Corporate Finance Institute, 20% is considered good, 10% average or standard, and 5% is considered low or poor. Good profit margins allow companies to cover their costs and generate a return on their investment.
Although profit margin varies by industry, 7 to 10% is a healthy profit margin for most small businesses. Some companies, like retail and food, can be financially stable with lower profit margin because they have naturally high overhead.