{"id":16310,"date":"2021-12-15T08:15:00","date_gmt":"2021-12-15T08:15:00","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=16310"},"modified":"2024-06-13T14:35:36","modified_gmt":"2024-06-13T09:05:36","slug":"understanding-financial-ratios-2","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-financial-ratios-2\/","title":{"rendered":"Understanding Financial Ratios for Stock Analysis"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"16310\" class=\"elementor elementor-16310\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"23ba90b\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b6a6f9f\" data-id=\"b6a6f9f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-e0f864e elementor-section-full_width elementor-section-height-default elementor-section-height-default\" data-id=\"e0f864e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-wide\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-7efb245 chapters_list\" data-id=\"7efb245\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-33d4575 elementor-widget elementor-widget-shortcode\" data-id=\"33d4575\" data-element_type=\"widget\" data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/introduction-to-fundamental-analysis\/\">Introduction to Fundamental Analysis<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/steps-in-fundamental-analysis\/\">Know Steps &#038; Economic Analysis In Fundamental Analysis<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/basic-terms-used-in-fundamental-analysis\/\">Understanding Basic Terms In Fundamental Analysis<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-financial-statements\/\">Understanding Financial Statements in Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-balance-sheet\/\">Understanding Stock Balance Sheet in Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-income-statements\/\">Understanding Income Statements in Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-financial-ratios-2\/\">Understanding Financial Ratios for Stock Analysis<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-cash-flows\/\">Understanding Cash Flows<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/liquidity-ratios\/\">Understanding Liquidity Ratio in Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/activity-ratios\/\">Understanding Activity Ratio in Stock Markets<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/risk-leverage-ratios\/\">Understanding Risk\/Leverage Ratios In Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/profitability-ratios\/\">Understanding Profitability Ratios in Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/valuation-ratios\/\">Understanding Valuation Ratios in Stock Market<\/a><\/li><\/ul><\/div><\/div><div class=\"chapters_toggle\" title=\"chapters\"><a title=\"chapters\" href=\"#\" id=\"open_chapters\"><span>View Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><a title=\"chapters\" href=\"#\" id=\"close_chapters\" style=\"display:none;\"><span>Hide Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa 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>Slides<\/span>                            \n                                                    <\/li>\n                                            <li id=\"videos\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"3\" role=\"tab\" tabindex=\"-1\" aria-controls=\"videos-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-eye\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                                    <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <div id=\"sa_slider_shortcode\"><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 2px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='Financial-Ratios' style='padding:4.9% 4.7%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>8.1 Financial Ratios<\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-51589 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios.png\" alt=\"Financial Ratios\" width=\"1053\" height=\"919\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios.png 1053w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios-300x262.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios-1024x894.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios-768x670.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios-50x44.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios-100x87.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/01\/Financial-Ratios-150x131.png 150w\" sizes=\"(max-width: 1053px) 100vw, 1053px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>Rather than examining individual data points, it is often more illustrative to compute the ratios between various elements of the financial statements. There are a number of standardized financial ratios that are used to assess factors such as the profitability, efficiency, liquidity, growth potential, and riskiness of a company. Ratios provide useful information about an individual company and facilitate comparisons between companies of different sizes.<\/p>\r\n<p>On a standalone basis, the financial ratio of a company conveys very little information. For instance, assume Amararaja Batteries has a profit margin of 9%, how useful do you think this information is? Well, not much, really. 9% profit margin is good, but how would I know if it is the best?<\/p>\r\n<p>However, assume you figure out Exide Industries profit margin is 5.3%. Now, as we are comparing two similar companies, comparing the profitability makes sense. Clearly, Amararaja seems to be a more profitable company between the two. Thus, the ratio makes sense only when you compare the ratio with another company of a similar size or when you look into the financial ratio trend. This means that once the ratio is computed, the ratio must be analyzed (either by comparison or tracking the ratio&#8217;s historical trend) to get the best possible inference.<\/p>\r\n<p>Financial ratios can be &#8216;somewhat loosely&#8217; classified into different categories, namely<\/p>\r\n<ol>\r\n<li>\r\n<p>Liquidity Ratio<\/p>\r\n<\/li>\r\n<li>\r\n<p>Activity Ratios<\/p>\r\n<\/li>\r\n<li>\r\n<p>Leverage Ratios<\/p>\r\n<\/li>\r\n<li>\r\n<p>Profitability Ratios<\/p>\r\n<\/li>\r\n<li>\r\n<p>Valuation Ratios<\/p>\r\n<\/li>\r\n<\/ol><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 1,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = jQuery('#text_slider');\n\t\tjQuery('.text_slider_goto1').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 0);\n\t\t});\n\t\tvar resize_16246 = jQuery('.owl-carousel');\n\t\tresize_16246.on('initialized.owl.carousel', function(e) {\n\t\t\tif (typeof(Event) === 'function') {\n\t\t\t\twindow.dispatchEvent(new Event('resize'));\n\t\t\t} else {\n\t\t\t\tvar evt = window.document.createEvent('UIEvents');\n\t\t\t\tevt.initUIEvent('resize', true, false, window, 0);\n\t\t\t\twindow.dispatchEvent(evt);\n\t\t\t}\n\t\t});\n\t});\n<\/script>\n<\/div>                    <\/div>\n\t\t        \n                    <div id=\"slides-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"slides-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgba(0,0,0,0); 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There are a number of standardized financial ratios that are used to assess factors such as the profitability, efficiency, liquidity, growth potential, and riskiness of a company. &#8230; <a title=\"Understanding Financial Ratios for Stock Analysis\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/fundamental-analysis-course\/understanding-financial-ratios-2\/\" aria-label=\"Read more about Understanding Financial Ratios for Stock Analysis\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":15096,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-16310","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/16310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=16310"}],"version-history":[{"count":15,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/16310\/revisions"}],"predecessor-version":[{"id":55659,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/16310\/revisions\/55659"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/15096"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=16310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=16310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}