The division of one piece of financial information by another. Financial ratios are very common in fundamental analysis, which investigates the financial health of companies.
Financial Ratios are key indicators of the financial performance of the company and are usually derived from its three statements including income statement, balance sheet, and cash flows. These financial ratios help in analyzing the companys profitability, liquidity, assumed risks as well as financial stability.
To calculate financial ration, numbers are taken from the balance sheet, income statement, and cash flow statement. The financial ratio is not a calculation but an explanation of the economic status of a company, in terms of profit, liquidity, leverage, and market valuation. A ratio may serve as an indicator, red flag or clue for various issues. What are financial ratios definition and meaningFinancial ratios are the main tools used in the analysis of financial statements. They measure and evaluate a company’s financial health, and are divided into three main categories:1. Return on equity (ROE) 2. Return on assets (RoA) 3. Return on investment (ROI)What is return on equity?Return on equity measures the profitability of a company. It is calculated as the net profit divided by the total equity.