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Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. [2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets. [3] Debt ratios measure the firm's ability to repay long-term debt. [4]
A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible. Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values. [6]
"Gross margin" is often used interchangeably with "gross profit", however, the terms are different: "gross profit" is technically an absolute monetary amount, and "gross margin" is technically a percentage or ratio. Gross margin is a kind of profit margin, specifically a form of profit divided by net revenue, e.g., gross (profit) margin ...
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Profit margin helps investors, the board of directors, lenders, and other key business leaders understand the company’s financial health, management's skill, and growth potential.
To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as Generally Accepted Accounting Principles (GAAP), these set of guidelines provide the basis in the preparation of financial statements, although many companies voluntarily disclose ...
But a too-high current ratio may indicate that a company is not investing effectively, leaving too much unused cash on its balance sheet. The current ratio should be placed in the context of the ...
Cash ratio is more restrictive than above mentioned ratios because no other current assets than cash can be used to pay off current debt. Most of the creditors give importance to cash ratio of the company, since it give them idea whether the entity is able to maintain stable cash balances in order to pay off their current debts as they come due.