Financial Ratios: Importance, types & Calculation

Ratios

What is Cash Ratio?

People who are involved in the finance and stock market industry often get to hear about Cash Ratio. However, quite often, people tend to get confused about what exactly Cash Ratio is all about.

Ratios

Current Ratio: An Important Liquidity Ratio

One of the most common reasons why liquidity is important for a business is to make payments and to meet current and/or regular cash needs. Liquidity refers to the ability of a company to meet its current obligations as and when they become due. It is one of the most essential factors that are responsible for the smooth running of a business.

Ratios

Liquidity Ratio: The Water of Accounting Ratios

Are you a shopping enthusiast? Do you love buying new things? There would hardly be any person who does not like buying fresh, new stuff. The one common pattern found with almost every shopper is the process of a proper analysis of the product before actually buying it.

Ratios

What is Return on Capital Employed?

Companies ensure that they provide better returns to their investors with the addition of leverage in their total capital, and thus show higher profitability and returns. We also previously understood evaluating a company's profitability and rate of returns to its investors with the use of Return on Assets (ROA) and Return on Equity (ROE) ratios. However, in order to understand how the company is using its total capital, one must know the rate of returns on the total capital employed. This ratio is known as the return on capital employed ratio.

Ratios

Understanding Financial and Operational Leverages

When a company wants to increase its investments in order to expand its asset base and generate returns towards risk capital, it sometimes borrows capital as a funding source. This is known as Leverage. Leverage is an investment strategy of using borrowed money, specifically from financial instruments or borrowed capital, to increase its potential rate of returns on equity. Leverage also refers to the amount a company borrows or the debt it uses to purchase or finance assets.

Ratios

DuPont Analysis and its importance

The Return on Asset and Return on Equity are one of the most important considerations an investor takes while making an investment decision. It gives an insight into how well a company is using its assets to generate revenue and determines the value it creates for its shareholders and investors. However, these ratios still do not provide the whole picture. It is important to break down the components of ROA and ROE, and understand each of their current positions so that an investor can make a more informed decision. Without breaking down the ROE, an investor can be duped into believing that a company is a good investment when, in reality, it's not. Hence, to break down the ROE components and understand each of their roles and effect on the ROE ratio, a DuPont Analysis is performed.

Ratios

Understanding Return on Equity

In the previous blogs, we understood the meaning and application of the accounting ratios of Return on Investments (ROI) and Return on Assets (RoA). While ROI gives an insight into overall profitability, ROA focuses on the returns generated through the efficient use of the assets a company possesses.

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Importance of Return on Assets in Investment Decision

In the last blog, we understood the need to analyse how a company uses its investments and assets in order to generate profits and provide returns to its investors, through the calculation of Return on Investment. However, as mentioned earlier, ROI is a broader measure and focuses on the returns generated on different types of investments. In order to make a clear and well-informed decision, one must focus on the more detailed and concentrated aspects and understand a company's profitability. The next step towards this will be to understand the return on a company's assets.

Ratios

Analyzing Investment Decisions through Return on Investments

Before making a decision on investing money in a company, a potential investor must analyze the company's ability to provide returns to its shareholders. Investors, business managers, stock advisors analyze this ability by calculating various ratios and percentages based on the company's financial statements. This analysis enables an investor to analyze a company's financial status and health. By converting the original financial numbers to ratios, it becomes easier to analyze the risks and trends in the market and the potential risks involved with the company.

Ratios

What is Cash Ratio?

Current Ratio: An Important Liquidity Ratio

Liquidity Ratio: The Water of Accounting Ratios

What is Return on Capital Employed?

Understanding Financial and Operational Leverages

DuPont Analysis and its importance

Understanding Return on Equity

Importance of Return on Assets in Investment Decision

Analyzing Investment Decisions through Return on Investments

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