Financial Ratios Explained
Liquidity Ratios (Can the company survive short-term stress?)
Current Ratio
Purpose: Measures short-term liquidity.
Interpretation: Above 1.0 generally indicates the company can cover near-term obligations.
Quick Ratio (Acid-Test)
Purpose: A more conservative liquidity test.
Why it matters: Shows whether the company can meet obligations without relying on inventory sales.
Profitability Ratios (Is the business actually making money?)
Profit Margin
Purpose: Measures earnings efficiency.
What it shows: The percentage of revenue that turns into profit.
Return on Assets (ROA)
Purpose: Measures profitability relative to asset base.
What it shows: How efficiently management uses assets to generate earnings.
Leverage & Risk (How much debt is involved?)
Debt-to-Equity (D/E)
Purpose: Measures financial leverage.
Interpretation: Higher ratios imply higher financial risk—especially during downturns.
Efficiency Ratios (How well does the company use what it owns?)
Asset Turnover
Purpose: Measures asset productivity.
What it shows: How effectively assets generate revenue.
Shareholder Metrics (What do owners get?)
Earnings Per Share (EPS)
Purpose: Profitability per share.
What it shows: The slice of profit each share represents.
Dividend Metrics
What they show: How much profit is returned to shareholders vs. reinvested.
Return Metrics (The heart of long-term investing)
Return on Equity (ROE)
Purpose: Measures profitability for shareholders.
Advanced view: DuPont analysis breaks ROE into margin × efficiency × leverage.
Return on Invested Capital (ROIC)
Purpose: Measures how well capital is allocated.
Why it matters: Sustain