3. Financial Ratios: Your Performance Metrics
Ratios simplify complex financials into digestible insights—key for quick decisions.
Liquidity Ratios
- Current Ratio: Healthy U.S. companies often maintain ratios of 1.5–3.0.
- Quick & Cash Ratio: Critical in tight-cash environments or startups where quick access to liquidity matters most.
Leverage Ratios
- Debt-to-Equity (D/E) signals how much a firm relies on borrowed funds.
- Interest Coverage and Cash Flow to Debt show a company’s ability to service its debt sustainably.
Efficiency Ratios
- Ratios like inventory turnover, receivables turnover, and the cash conversion cycle identify how well capital tied up in operations generates revenue(Investopedia).
Profitability Ratios
- Margins (gross, operating, net), ROA, and ROE assess how smartly a company converts assets and equity into earnings.
Market Value Ratios
- Metrics such as P/E, P/B, and dividend yield show how the market values a business relative to performance.
Advanced Insight: DuPont Analysis
- Decomposes ROE into profitability, efficiency, and leverage. This is like peeling an onion to reveal a business’s strengths and weaknesses (Wikipedia).
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