Definition
Financial ratios are calculations built from income statement, balance sheet, cash flow, or market data to help compare companies on a standardized basis.
Common categories
- Profitability ratios such as BEP, ROA, and ROE
- Liquidity ratios such as the current ratio
- Leverage ratios such as debt-to-equity
- Efficiency ratios such as asset turnover
- Valuation ratios such as price-to-book or EV/EBIT
Why it matters
Ratios make large financial statements easier to compare, especially across peers and over time. They are most useful when used together rather than in isolation.
Where to apply it
Start with a profitability ratio such as Basic Earning Power, then add balance-sheet, cash-flow, and valuation ratios to build a fuller view of risk and upside.