6 Basic Financial Ratios And What They Reveal

Courtesy of Investopedia

The working capital ratio reveals how easily a company can turn assets into cash. It’s current assets divided by current liabilities.

The quick ratio is like the working capital ratio, but subtracts inventories from current assets before dividing by liabilities. It shows if a company’s cash will cover short-term obligations.

Earnings per share measures a company’s net income earned on each share of its common stock. It’s net income minus dividends on preferred stock, divided by average outstanding shares.

The price-to-earnings ratio is the current share price divided by the EPS. If a share was $46.51 at the end of a session, and its EPS over the previous 12 months averaged $4.90, its PE ratio is 9.49.

The debt-to-equity ratio shows if a company is borrowing too much. It’s outstanding debt divided by shareholders’ equity.

Return on equity shows investors how profitable their investments are. It’s a firm’s net earnings after taxes, subtracted by preferred dividends, and then divided by common equity dollars.