Important Financial Ratios
Ratios are useful tools in order to measure the performance of different companies. They help compare apples-to-apples since the actual numbers can be misleading.
Financial ratios can help you paint a better picture of how the company is doing when comparing it to its competitors. If Company A makes $3 million, is that good or bad? We don’t really know until we look at other companies. Let’s say we look at Company B and it is making $10 million. Wow, now Company A’s $3 million look really bad.
But wait a second, what if Company A sells only $6 million of goods and gets to keep $3 million in operating income, while Company B has to sell $100 million in order to get to keep $10 in operating income. That means that Company A is making 50% of its sales, while company B is making only 10%.
Financial ratios help us compare companies of different sizes and make it an apple-to-apple comparison.
Here are some of the most important financial ratios: