Financial ratios: what are they and what types exist?00000000000000000
Posted: Mon Jan 06, 2025 8:24 am
In this post you will learn what financial ratios are and what types exist to know if they have been managed well or poorly in your company.
Ratios are tools that any financial director uses to analyse the situation of his or her company. Ratio analysis can help you determine whether a company has been managed well or poorly. Well-founded economic and financial projections can be made to improve decision-making. At the same time, optimal inventory management is ensured .
In this post we are going to explain what ratios are and what are the main types of ratios that are used in companies to know if they are being managed well or not.
Monitor your company's financial ratios in real time
Holded automates your accounting by giving you visibility into your business' key metrics
Mathematically, a financial ratio is the relationship between two variables . In companies, ratios are used to know how to analyze a balance sheet . By relating two variables of the balance sheet or income statement, information is obtained about the financial situation of the company, revealing good (or bad) management.
Comparison of financial ratios from japan number data different periods also helps to detect trends . Analysis of these ratios helps to anticipate problems and enables appropriate solutions to be found in time.
Although there are a number of ratios that all companies usually use to analyse their financial situation, each company must determine which information is most useful to it and, therefore, which ratios it is interested in including in its financial dashboard .
Types of financial ratios
There are many types of financial ratios, but the most commonly used can be classified into four large groups: liquidity ratios, management or activity ratios, debt or leverage ratios and profitability ratios.
1. Liquidity ratios
Liquidity ratios are used to measure the solvency level of a company, that is, whether it will be able to pay its debts when they are due . Although this ratio is usually used more to measure short-term solvency, both in the short and long term it can also be used to anticipate cash flow problems.
There are 4 liquidity ratios:
1.1. The general liquidity ratio or current ratio
This ratio indicates the proportion of short-term debts that can be covered by asset elements.
General Liquidity = Current Assets / Current Liabilities
1.2. The acid test ratio
The acid test financial ratio, also known by its English name – acid test – is a more refined measure of a company's ability to meet its short-term debts with assets, since it subtracts from these items those that form part of the inventory.
Why subtract them? For one key reason: assets that are part of inventory also happen to be the least liquid. In other words, these are the assets that will be most difficult to convert into cash in the (undesirable) event of bankruptcy.
Ratios are tools that any financial director uses to analyse the situation of his or her company. Ratio analysis can help you determine whether a company has been managed well or poorly. Well-founded economic and financial projections can be made to improve decision-making. At the same time, optimal inventory management is ensured .
In this post we are going to explain what ratios are and what are the main types of ratios that are used in companies to know if they are being managed well or not.
Monitor your company's financial ratios in real time
Holded automates your accounting by giving you visibility into your business' key metrics
Mathematically, a financial ratio is the relationship between two variables . In companies, ratios are used to know how to analyze a balance sheet . By relating two variables of the balance sheet or income statement, information is obtained about the financial situation of the company, revealing good (or bad) management.
Comparison of financial ratios from japan number data different periods also helps to detect trends . Analysis of these ratios helps to anticipate problems and enables appropriate solutions to be found in time.
Although there are a number of ratios that all companies usually use to analyse their financial situation, each company must determine which information is most useful to it and, therefore, which ratios it is interested in including in its financial dashboard .
Types of financial ratios
There are many types of financial ratios, but the most commonly used can be classified into four large groups: liquidity ratios, management or activity ratios, debt or leverage ratios and profitability ratios.
1. Liquidity ratios
Liquidity ratios are used to measure the solvency level of a company, that is, whether it will be able to pay its debts when they are due . Although this ratio is usually used more to measure short-term solvency, both in the short and long term it can also be used to anticipate cash flow problems.
There are 4 liquidity ratios:
1.1. The general liquidity ratio or current ratio
This ratio indicates the proportion of short-term debts that can be covered by asset elements.
General Liquidity = Current Assets / Current Liabilities
1.2. The acid test ratio
The acid test financial ratio, also known by its English name – acid test – is a more refined measure of a company's ability to meet its short-term debts with assets, since it subtracts from these items those that form part of the inventory.
Why subtract them? For one key reason: assets that are part of inventory also happen to be the least liquid. In other words, these are the assets that will be most difficult to convert into cash in the (undesirable) event of bankruptcy.