Ratio Calculation - Types of Ratio Calculation

Ratio analysis is a statistical method for examining the balance sheet and income statement of a firm in order to learn more about its liquidity, efficiency, and profitability. Ratio analysis serves as the foundation for basic equity research.

Ratios serve as benchmarks for businesses. They assess the stocks of a certain sector. They also compare a company's present performance to its past results. Understanding the factors influencing ratios is often significant since management has the freedom to occasionally change its approach to improve its stock and business ratios.

Types of Ratio Calculation

Allcalculator.net's Ratio calculators are numerous types. Based on the types of data they give, the numerous financial ratios that are available may be roughly categorized into the following six silos:

1. Liquidity Ratios

Using the company's current or quick assets, liquidity ratios gauge a company's capacity to settle its short-term loans when they fall due. The current ratio, quick ratio, and working capital ratio are all examples of liquidity ratios.

1. Solvency Ratios

Solvency ratios, also known as financial leverage ratios, assess a company's probability of surviving over the long run by paying down its long-term debt as well as the interest on its debt by comparing its debt levels with its assets, equity, and profits. Debt-equity ratios, debt-assets ratios, and interest coverage ratios are a few examples of solvency ratios.

1. Profitability Ratios

These statistics demonstrate how well a business can turn a profit from its activities. Examples of profitability ratios include profit margin, return on assets, return on equity, return on capital employed, and gross margin ratios.

1. Efficiency Ratios

Efficiency ratios, often known as activity ratios, assess how effectively a business uses its assets and liabilities to drive sales and optimize profits. The turnover ratio, inventory turnover, and days' sales in inventory are important efficiency ratios.

1. Coverage Ratios

Coverage ratios gauge a company's capacity to meet its obligations, including interest payments and other debt-related responsibilities. Examples include the debt-service coverage ratio and the time's interest earned ratio.

1. Market Prospects Ratio

These ratios are the ones that fundamental analysis uses the most frequently. These metrics include the dividend yield, P/E ratio, EPS, and dividend payout ratio. These measures are used by investors to forecast earnings and future performance.

For instance, a stock with a P/E ratio of seven would be seen as being cheap if the average P/E ratio of all the businesses in the S&P 500 index is 20, and the bulk of the companies had a P/E between 15 and 25. One with a P/E ratio of 50, however, would be seen as being overpriced. Future trends for the former may be upward while those for the latter could be down until each is in line with its inherent worth.