Essential Financial Ratios for Fundamental Analysis: A Comprehensive Guide

Fundamental analysis involves evaluating the financial health and performance of a company by examining various financial ratios. These ratios provide valuable insights into a company's profitability, liquidity, efficiency, and overall financial stability. Here's a comprehensive guide to some essential financial ratios used in fundamental analysis:

Profitability Ratios:

Gross Profit Margin: (Gross Profit / Revenue) * 100
Net Profit Margin: (Net Income / Revenue) * 100
Return on Assets (ROA): (Net Income / Total Assets) * 100
Return on Equity (ROE): (Net Income / Shareholders' Equity) * 100
Earnings per Share (EPS): (Net Income / Average Shares Outstanding)

Liquidity Ratios:

Current Ratio: Current Assets / Current Liabilities
Quick Ratio (Acid-Test Ratio): (Current Assets - Inventory) / Current Liabilities
Cash Ratio: Cash and Cash Equivalents / Current Liabilities

Solvency Ratios:

Debt-to-Equity Ratio: Total Debt / Shareholders' Equity
Debt Ratio: Total Debt / Total Assets
Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense

Efficiency Ratios:

Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory
Accounts Receivable Turnover: Net Credit Sales / Average Accounts Receivable
Accounts Payable Turnover: Purchases / Average Accounts Payable

Market Valuation Ratios:

Price-to-Earnings Ratio (P/E): Market Price per Share / Earnings per Share
Price-to-Sales Ratio (P/S): Market Price per Share / Revenue per Share
Price-to-Book Ratio (P/B): Market Price per Share / Book Value per Share
Dividend Yield: Dividend per Share / Market Price per Share

Growth Ratios:

Sales Growth Rate: ((Current Year Sales - Previous Year Sales) / Previous Year Sales) * 100
Earnings Growth Rate: ((Current Year Earnings - Previous Year Earnings) / Previous Year Earnings) * 100

Remember that financial ratios should not be analyzed in isolation, but rather in comparison to industry peers or historical performance. Different industries may have different benchmarks for these ratios, so it's important to consider industry norms and trends as well. Additionally, ratios should be used alongside other qualitative and quantitative factors to gain a comprehensive understanding of a company's financial position and prospects.

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