How to Evaluate Financial Strength Using Ratio Formulas


Financial ratio formulas can be used to determine a companies stability, long term growth, and investment potential. Using these basic ratio formulas can give you an objective insight into financial strength.

Things You'll Need

  • Computer
  • public financial information
  • financial ratio formulas
  • Understand a companies leverage or borrowing power ratio. Leveraging is a companies amount of debt in relation to its assets and equity. Ratio formulas measuring financial leveraging include debt to equity and asset turnover.

  • Determine a companies financial liquidity ratio. Financial liquidity is figured by using formulas dividing total assets by total liabilities.

  • Estimate a companies operating ratio or use of capital. To find the ratio of working capital divide the companies total day to day earnings by costs.

  • Measure a companies profitability ratio. Profitability is measured with a number of formula ratios but the simplest is gross profit margin in which gross profit are divided by total revenue. This should show some variation but remain mostly stable as an indicator of good financial practices.

  • Evaluate a companies financial solvency. Solvency is stability over time or the likely hood of a company falling into bankruptcy. Ratio formulas used to measure this include debt to equity, debt to assets, fixed costs, or interest ratios.

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