Definition of Business Financial Ratios
Business financial ratios are evaluation tools companies use to examine the performance of their operations. Financial ratios are used by managers and outside stakeholders to evaluate business strengths and weaknesses.
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Facts
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Financial statements are broken down using financial ratios that measure each section of a company's financial information. Common ratio groups are liquidity, asset turnover and financial leverage.
Types
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Liquidity ratios measure how well a company could pay off short-term debt with current assets, such as cash, receivables and inventories. Asset-turnover ratios indicate how well a company uses assets to generate sales. Leverage ratios determine the longevity of a firm based on current debt load.
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Function
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Financial ratios create a simple trending tool that managers use when looking at the historical performance of business operations.
Considerations
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Companies often compare internal financial ratios with the industry standard or their top competitor to see how well their company operates in the current economic climate. This analysis creates a benchmark, giving managers a goal for improving operations.
Uses
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Banks and other lenders may review a company's financial ratios to determine how much risk a company has if it is borrowing money. Poor liquidity-ratio calculations can indicate low cash flow, making companies a weak candidate for loans.
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