A comparative measure that relates one or more financial statement item(s) to one or more financial statement item(s). A financial ratio provides analytical information about the financial health of a company based on the raw information set out in its financial statements. This involves the use of past financial data to infer trends and figure out fundamental relationships. Company performance is typically assessed using financial ratios which can quantify various aspects of a company’s operations and help analyze its financial position. Financial ratios are analyzed before making vital decisions involving the company. For example, lenders evaluate specific ratios (debt ratios) to decide whether to lend funds to a company and at what interest rate.

In general, financial ratios can be classified into: liquidity ratios, activity ratios, leverage ratios, profitability ratios, and market value ratios. They are often stated as percentages, times, or intervals. For example, liquidity ratios measure the ability of a company to pay its obligations in the short term. One of the most widely used liquidity ratios is the current ratio that relates a company’s current assets to its current liabilities. Other liquidity ratios include quick ratio, cash ratio, etc. Moreover, market value ratios gauge the market’s perception of the ability of a company to generate earnings in the future, as reflected in the price of its stock share.