ratio

(noun)

A number representing a comparison between two things.

Related Terms

Examples of ratio in the following topics:

  • Total Debt to Total Assets

    • The debt ratio is expressed as Total debt / Total assets.
    • Financial ratios are categorized according to the financial aspect of the business which the ratio measures.
    • Debt ratios measure the firm's ability to repay long-term debt.
    • The higher the ratio, the greater risk will be associated with the firm's operation.
    • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

  • Ratio Analysis and EPS

    • Financial ratios are categorized according to the financial aspect of the business which the ratio measures .
    • Acid-test ratio (Quick ratio): (Current assets - Inventory - Prepayments) / Current liabilities
    • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
    • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
    • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios

  • Classification

    • Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
    • Most analysts think of financial ratios as consisting of five basic types:
    • Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
    • Market ratios are concerned with shareholder audiences.
    • Classify a financial ratio based on what it measures in a company

  • Current Ratio

    • Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
    • Acid Test - a ratio used to determine the liquidity of a business entity.
    • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
    • This can allow a firm to operate with a low current ratio.
    • If all other things were equal, a creditor, who is expecting to be paid in the next 12 months, would consider a high current ratio to be better than a low current ratio.

  • Selected Financial Ratios and Analyses

    • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
    • The following are some examples of financial ratios that are used to analyze a company.
    • This ratio indicates the proportion of income that has been realized in cash.
    • As with quality of sales, high levels for this ratio are desirable.
    • Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions.

  • Quick Ratio (Acid-Test Ratio)

    • In finance, the Acid-test (also known as quick ratio or liquid ratio) measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.
    • A company with a Quick Ratio of less than 1 cannot pay back its current liabilities.
    • Acid test often refers to Cash ratio instead of Quick ratio: Acid Test Ratio = (Current assets - Inventory) / Current liabilities.
    • Note that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the Current Ratio.
    • The acid test ratio should be 1:1 or higher, however this varies widely by industry.

  • Market/Book Ratio

    • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
    • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
    • As with most ratios, it varies a fair amount by industry.
    • It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio.
    • Calculate the different types of price to book ratios for a company

  • Basic Earning Power (BEP) Ratio

    • The Basic Earning Power ratio (BEP) is Earnings Before Interest and Taxes (EBIT) divided by Total Assets.
    • Another profitability ratio is the Basic Earning Power ratio (BEP).
    • The BEP ratio is simply EBIT divided by total assets .
    • The higher the BEP ratio, the more effective a company is at generating income from its assets.
    • BEP is calculated as the ratio of Earnings Before Interest and Taxes to Total Assets.

  • Liquidity

    • Liquidity, a business's ability to pay obligations, can be assessed using various ratios: current ratio, quick ratio, etc.
    • The operating cash flow ratio can be calculated by dividing the operating cash flow by current liabilities.
    • The liquidity ratio (acid test) is a ratio used to determine the liquidity of a business entity.
    • Liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash.
    • The liquidity ratio is the result of dividing the total cash by short-term borrowings.

  • Setting the Target Payout Ratio

    • The Target Payout Ratio, or Dividend Payout Ratio, is the fraction of net income a firm pays to its stockholders in dividends.
    • Investors seeking high current income and limited capital growth prefer companies with high Dividend Payout Ratios.
    • However investors seeking capital growth may prefer lower payout ratios.
    • High growth firms in early life generally have low or zero payout ratios.
    • For smaller growth companies, the average payout ratio can be as low as 10%