Common Ratios in Financial Analysis

Financial analysts use many ratios while analyzing a company. Since there are many ratios, it becomes easy to categorize them under broad categories. The following table lists the categories and the key ratios within each category.

Category	Description	Key ratios
Activity ratios	Activity ratios measure how effectively a business uses its resources, such as receivables collection, inventory, etc. Also called efficiency ratios	Inventory Turnover Days of Inventory on Hand (DOH) Receivables Turnover Days of Sales Outstanding (DSO) Payables Turnover Number of Days of Payables Working capital Turnover Fixed Asset Turnover Total Asset turnover
Liquidity ratios	Liquidity ratios measure a business’s ability to meet its debt obligation in the short-term	Current Ratio Quick Ratio Cash Ratio Defensive Interval Ratio Cash Conversion Cycle
Solvency ratios	Solvency ratios measure a business’s ability to meet its obligations in the long-term. Also called leverage ratios.	Debt Ratios Debt/Asset Ratio Debt/Capital Ratio Debt/Equity Ratio Financial Leverage Ratio   Coverage Ratios Interest Coverage Fixed Charge Coverage
Profitability ratios	Profitability ratios measure how profitable a company is.	Return on Sales Gross Profit Margin Operating Profit Margin Pretax Margin Net Profit Margin   Return on Investment Operating ROA ROA Return on Total Capital ROE Return on Common Equity
Valuation ratios	These ratios measure the value of a company.	Price/Equity Ratio Price/Cash Flow Price/Sales Price/Book Value Earnings Per Share Cash Flow per Share EBITDA per Share Dividends per Share Dividend Payout Ratio Retention Rate Sustainable Growth Rate

An analyst uses a combination of these ratios to analyze various aspects of a business. We will look at all these ratios in the following articles.