Financial ratios are calculated relative ratios mostly derived from a company’s financial statements (see also the definition as per Wikipedia). They are required by management, financial analysts, investors, creditors, and other stakeholders to understand better and read financial statements. Also, calculating financial ratios puts the financial statements into perspective when comparing them with similar ratios serving as peer companies’ benchmarks.
We can identify five different types of financial ratios when analyzing financial statements:
Liquidity ratios
Efficiency ratios
Profitability ratios
Growth Ratios
Leverage (or bank) ratios
These ratios have varied roles in interpreting the business’s financial condition and their financial ratios formulas use different aspects of the financial statements in their interpretations. The idea is to look at a company from different angles so that we can understand the full picture. For this, we will have to calculate a series of financial ratios.
Read more at https://www.efinancialmodels.com/2020/10/14/financial-ratios-analysis-and-its-importance/
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