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Financial ratios are an integral part of financial analysis. Whether you are looking for investing in a company or comparing two companies, these ratios should be there on the table. For entrepreneurs, they are the metrics for measuring the performance of the company. So, here we will be discussing five such financial ratios which are regarded as the crucial ones. 

Working Capital Ratio:

This ratio tells you about the company’s ability to meet the current liabilities with the current assets it has. The working capital ratio is determined by dividing the current assets by the current liabilities.

Working Capital Ratio = Current Assets / Current Liabilities 

It is also known as the current ratio or liquidity ratio. A 2:1 or 3:1 working capital ratio suggests the company is financially sound. However, if you are comparing the current ratio of two companies having the same ratio, then you need to check which one is having more cash in hand. 

Quick Ratio:

Quick ratio determines whether a company can pay off its short-term liabilities or not with its given current assets. Here the current assets include those assets which can be converted into cash within just ninety days. It includes cash, short-term investments, current accounts receivables, marketable securities, cash equivalents. It is calculated as 

Quick Ratio = (Cash+ Cash equivalents + Marketable Securities + Current account receivables) / Current Liabilities
Anything above 1:1 is preferable by the companies as that shows that the creditors can be paid off easily and there is liquidity. 

EPS:

It is the Earnings Per Share that are calculated as 

EPS = (Net income – Preferred dividends) / Weighted Average of common shares outstanding 

It is a market prospect ratio that is mainly useful for investors. This shows how much an investor can earn on each share out of the profit made by the company. If all profits were distributed amongst the investors, then this amount every investor would have received. 

P/E Ratio:

This ratio is mainly used to find out the fair price of a stock by forecasting future earnings. It is calculated as 

P/E ratio = Market value per share/ EPS

A high P/E ratio suggests that the company is having the potential to perform better in the future. Thus, the investors are willing to pay more for the shares. 

ROE:

Return on Equity is determined by 

ROE = Net income/ shareholders’ equity

This ratio tells the investor whether they are getting the right return on their investment or not. This also tells whether the company is using the equity (shareholders’ fund) efficiently and optimally or not. 

Financial ratios are crucial for every investor and entrepreneur. Without these ratios, there cannot be any financial analysis, predictions, and anticipations. So, it is important to remember these ratios at the back of your hand.