What does ratio mean by

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financial analysts

Financial analysts use the term “ratio” to refer to a mathematical comparison of two or more numbers. Ratios can be used to compare financial data, such as sales, profits, and assets, in order to analyze a company’s financial performance. Ratios can also be used to compare a company to its competitors, or to industry averages.

The most common financial ratios include profitability ratios, liquidity ratios, efficiency ratios, and solvency ratios. Profitability ratios measure how well a company is performing financially, and include measures such as return on assets (ROA), return on equity (ROE), and earnings per share (EPS). Liquidity ratios measure a company’s ability to meet its short-term obligations, and include measures such as current ratio and quick ratio. Efficiency ratios measure how efficiently a company is using its assets, and include measures such as inventory turnover and days sales outstanding. Solvency ratios measure a company’s ability to pay its long-term liabilities, and include measures such as debt to equity ratio and interest coverage ratio.

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Analysts use ratios to compare a company’s performance to its competitors or to industry averages. By comparing a company’s ratios to those of its competitors or to industry averages, analysts can gain insight into a company’s strengths and weaknesses. For example, if a company’s return on equity is higher than its competitors’, it could indicate that the company is a better performer. Conversely, if a company’s current ratio is lower than its competitors’, it could indicate that the company is having difficulty meeting its short-term obligations.

Ratios can also be used to identify potential problems. For example, if a company’s debt to equity ratio is significantly higher than its competitors’, it could indicate that the company has taken on too much debt. Similarly, if a company’s inventory turnover is significantly lower than its competitors’, it could indicate that the company is not efficiently managing its inventory.

Ratios are an important tool for financial analysts, as they provide insight into a company’s financial performance and can help identify potential problems. By analyzing ratios, analysts can compare a company’s performance to its competitors or to industry averages, and identify areas where the company may need to improve.

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