Understanding key ratios and metrics is essential for investors conducting fundamental analysis. These indicators help evaluate a company's financial health and growth potential, guiding investment decisions.

Profitability Ratios

Profitability ratios measure a company's ability to generate profit relative to its revenue, assets, or equity. Common ratios include:

  • Net Profit Margin: Indicates how much profit is earned from each dollar of revenue.
  • Return on Assets (ROA): Shows how efficiently a company uses its assets to generate profit.
  • Return on Equity (ROE): Reflects the profitability relative to shareholders' equity.

Liquidity Ratios

Liquidity ratios assess a company's ability to meet short-term obligations. Key ratios include:

  • Current Ratio: Current assets divided by current liabilities.
  • Quick Ratio: (Current assets - Inventory) divided by current liabilities.

Leverage Ratios

Leverage ratios evaluate the degree of a company's financial leverage and debt levels. Important ratios include:

  • Debt-to-Equity Ratio: Total liabilities divided by shareholders' equity.
  • Interest Coverage Ratio: Earnings before interest and taxes (EBIT) divided by interest expenses.

Efficiency Ratios

Efficiency ratios measure how well a company utilizes its assets and manages its operations. Examples include:

  • Asset Turnover: Revenue divided by total assets.
  • Inventory Turnover: Cost of goods sold divided by average inventory.