1. What is a Financial Ratio?

A financial ratio is a relative magnitude of two selected numerical values taken from a company's financial statements. Ratios are used to evaluate various aspects of a company's operating and financial performance.

2. How Does the Calculator Work?

The calculator uses the basic financial ratio formula:

Where:

• Numerator — The top number in the ratio (USD)
• Denominator — The bottom number in the ratio (USD)

Explanation: The ratio provides a standardized way to compare different aspects of financial performance across companies and industries.

3. Importance of Financial Ratios

Details: Financial ratios are essential tools for financial analysis that help investors, analysts, and managers evaluate company performance, financial health, and growth potential.

4. Using the Calculator

Tips: Enter both numerator and denominator in USD. The denominator must be greater than zero to avoid division by zero errors.

5. Frequently Asked Questions (FAQ)

Q1: What are common financial ratios?
A: Common ratios include profit margin (Net Income/Revenue), current ratio (Current Assets/Current Liabilities), and debt-to-equity ratio (Total Debt/Total Equity).

Q2: How are financial ratios used?
A: They're used for company valuation, credit analysis, performance benchmarking, and investment decision-making.

Q3: What are good ratio values?
A: Ideal values vary by industry and ratio type. For example, a current ratio above 1.0 is generally good, but optimal values differ across sectors.

Q4: Can ratios be compared across industries?
A: Caution is needed as different industries have different financial structures and operating models.

Q5: What are limitations of financial ratios?
A: Ratios are based on historical data, may be affected by accounting methods, and don't capture qualitative factors.