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What are the Five Types of Financial Ratios?
Profitability ratios
Operational ratios
Liquidity ratios
Leverage ratios
Valuation ratios
Five types of financial ratios are
1. Short term liquidity ratios : It gives the information about the short term liquidity position of the company. Important ratios are current ratio, quick ratio, working capital to current liabilities
2. Long term liquidity ratios : It gives the information about the long term term liquidity position of the company. Important ratios are Interest coverage ratio, Debt service coverage ratio, Fixed charges coverage ratios.
3. Leverage ratios : It gives the information as what percentage of debt is used in capital structure of a company to finance its assets . Important ratios are Debt to Equity ratio, capital gearing ratio
4. Turnover ratios : It gives the information about a company's activity . Ex : Debtors turnover ratio, Creditors turnover ratio, Inventory turnover ratio, Working capital turnover ratio etc.
5. Profitability ratios : It gives the information about a company's profit margin at different stages . Ex. Gross margin ratio, Net margin ratio, Operating margin ratio, P/E ratio etc.
1- Liquidity ratios
2- Activity ratios
3- leverage ratios
4- Performance ratios
5- Valuation ratios
Ratios plays an important role in Financial Statements analysis, may be for investors or any other users.
5 types of Financial Ratios are:
Liquidity/ Solvency Ratio: To measure an entity's ability to meet its short term obligations. e g: Current ratio, Quick/Acid test ratio.
Activity Ratio: To measure the efficiency of the entity's business operations. e g: Receivables turnover, Inventory turnover.
Profitability Ratios: To measure the entity's ability to generate earnings. e g: Gross margin, Return on asset.
Coverage Ratios: To measure the entity's ability to meet its obligations. e g: Debt to equity, Debt to asset.
Valuation Ratios: To measure the market value of entity's stock. e g: Price to earnings, price to cash flows.
Liquidity:
Activity:
Leverage:
Performance:
Valuation:
1-Profitability
2-liquidity
3-solvency
4-levarage
5-Avtivity(efficiency in managing assets)
Below are some known financial Ratio:
Gross Profit Margin= Gross profit / Revenue
Operating Profit Margin = Operating Profit / Revenue
Asset turnover ratio = Revenue / Total assets
Current Ratio= Current assets / Current liabilities
Quick ratio = Current assets – Inventories / Current liabilities
Debt to equity ratio = Total liabilities / Shareholder’s equity
profitability , liquidity,efficiency,gearing and investing ratios
Some financial ratios are excellent with penny stocks, while others do not work well. In a previous article, I introduced you to which calculations work best with smaller and newer companies, and here I will delve into the bigger picture of the 5 types of financial ratios, and how they can turn your investment uncertainty into clear profits.
A financial ratio is simply one number from a company's financial results divided by another. When you combine various values and information, the merits (or lack thereof) of the underlying company show clearly.
For example, the fact that the share price of an investment is $2.13 tells you very little. However, if you know the Price/Earnings ratio is 8.5, it relays much more context. Taken a step further, you can then compare that P/E to massive corporations, direct competitors, and even to the previous results from the exact same business.
Yes, looking into many of these ratios will involve a bit of work, but most are calculated automatically for you and displayed on all major online financial portals. The information which you can glean from them is unmatched and puts you at an advantage to just about every other investor out there.
Liquidity: These ratios will demonstrate a company's ability to pay their debts and liabilities. If they do not have enough short-term assets to cover short-term obligations, or they do not generate enough cash flow to cover costs, they may face financial problems.
Liquidity ratios are of extra importance with penny stocks specifically, since the tinier and newer companies have tremendous difficulties paying all the bills before their businesses become established.
Some liquidity ratios include the current ratio, quick ratio, cash ratio, and operating cash flow. For investors willing to gain an advantage by taking on a small amount of work, you can see summaries of the actual ratio calculations on many top websites.
Activity: These demonstrate how efficiently the business operates. How well does the company use the resources available to generate sales?
There are a few great activity ratios investors should apply in their research; inventory turnover; receivables turnover; payables turnover; working capital turnover; fixed asset turnover; total asset turnover.
Leverage: These ratios will demonstrate a company's ability to pay their long-term debt.
Leverage ratios are also referred to as debt ratios; debt ratio; debt to equity; interest coverage.
Performance: Performance ratios are all about profit, which might explain why they are frequently referred to as profitability ratios.
Since most penny stocks are not operating profitably, it will not be possible to generate any performance ratio values. You can not divide the price of shares by zero!
Performance ratios tell a clear picture of how profitable a business is at various stages of their operations; gross profit margin; operating profit margin; net profit margin; return on assets; return on equity.
Valuation: Since valuation ratios are based on the current share price, they provide a picture of whether or not the penny stock is a compelling investment at current levels. Basically, how much cash, or working capital, or cash flow, or earnings, do you get for each dollar invested?
Some valuation ratios include; Price/Earnings (P/E); Price/Cash Flow; Price/Sales (P/S); Price/Earnings/Growth Rate (PEG).
Take the time to learn about each of these ratios, which you can then compare directly to those of competitors, or even against the same company itself from previous quarters and years. The added value to your understanding of a business will make all the difference in your investment results, and your clarity of trading decisions.
