Investing for Beginners , investing

Financial ratios are ratios that are used in financial analysis or in other words that are using financial data of a company. Such financial data usually is found in financial statements (income statement, balance sheet or cash flow statement) but some ratios, for example, used for stock valuation may require additional data as stock price or outstanding shares number. 

Each financial ratio has its purpose, but basically all ratios can be classified depending on the analysis intention.

Financial ratios for stock valuation:

• P/E ratio (price-to-earnings)
• P/B ratio (price-to-book value)
• P/S ratio (price-to-sales)
• P/CF ratio (price-to-cash flow)
• P/FCF ratio (price-to-free cash flow)
• P/NAV ratio (price-to-NAV)
• EV/EBITDA ratio
• EV/S ratio
• PEG ratio
• Dividend yield
• Free cash flow yield

Financial ratios to measure company’s financial stability:

• Debt to EBITDA
• EBITDA coverage ratio
• Debt to equity
• Debt to asset ratio
• Interest coverage ratio
• Equity ratio
• Asset to equity ratio
• Cash flow coverage ratio
• Other coverage ratios

Financial ratios to measure profitability of sales:

• Gross margin
• EBITDA margin
• Operating margin
• Net margin

Financial ratios to measure return on assets:

• ROIC (return on invested capital)
• ROA (return on assets)
• ROE (return on equity)
• IRR (internal rate of return)
• ROI (return on investment)
• ROCE (return on capital employed)

Efficiency ratios:

• Working capital ratio 
• Total asset turnover ratio
• Fixed asset turnover ratio
• Inventory turnover ratio
• Receivable turnover ratio
• Average collection period
• Accounts payable turnover
• Days sales outstanding
• Days payable oustanding
• Days inventory outstanding
• Cash turnover ratio

Ratios to measure company’s financial liquidity:

• Quick ratio
• Current ratio
• Cash ratio

Ratios applied only for banks or other financial institutions:

• Capital adequacy ratio
• Net interest margin
• Net interest income
• Cost to income ratio
• Interest spread
• Loans to deposit ratio
• Loans to assets ratio
• Non-performing loans ratio
• Reserve ratio

Financial ratios for investment portfolios:

• Sharpe ratio
• Treynor ratio
• Sortino ratio
• Jensen’s alpha
• Turnover ratio
• Beta

To know which ratio is exactly needed for you, you have to be clear about the purpose of financial ratio. Most of the times, you need to calculate more than one ratio to comprehend the financial situation of the company. Sometime, for example, in case of detailed stock valuation you might need to calculate almost all of the above mentioned ratios. However, to use them correctly some financial experience is needed inevitably.