Summary of Key financial ratios

On Oct 22, 2024

Financial ratios are an evaluation tool that is used by the analysts to understand the financial performance, its financial position, and results of its operations. Financial ratio analysis does not serve as a stand-alone tool, as its results are persuasive rather than conclusive. This tool must be used in combination with other tools to make a better decision. Moreover, financial analysis is based on the historical data.

There are different sets of financial ratios that are used by the analysts and each set of ratios emphasize on specific aspects of the result of the business. Moreover, choice of ratios to be used also depends on the decision under consideration and the user of the financial information

Set of financial ratios	General interpretations	Key users
1- Liquidity ratios	Liquidity ratios aim at determining the liquidity position of the companies, i.e., a company’s potential to fulfil its current obligations.	Management, Suppliers, customers, Investors and Banks.
2- Profitability ratios	Profitability ratios are used mainly to identify the potential of the business in terms of its ability to generate profits.	Shareholders, Management, Investors, and banks etc..
3- Activity ratios	Activity ratios help to evaluate the business activities to see how well the activities are being managed and how the assets of the business are being used to generate profits.	Management, employees, vendors, and customers etc.
4- Leverage ratios	These ratios determine the capital structure of the businesses to identify the risks associated with it by determining the vested interests of lenders and owners.	Shareholders, Lenders, banks, and financial institutions etc.
5- Investors’ ratios	These ratios help to evaluate the prospects of investing in the business.	Shareholders, potential Investors, stock exchange, banks, credit rating agencies, and government etc.