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Financial Ratio

A financial ratio is a numerical comparison derived from a company’s financial statements, used to evaluate its performance, efficiency, and financial health. Ratios like the price-to-earnings (P/E) ratio, debt-to-equity ratio, and return on equity (ROE) provide insights into profitability, liquidity, and solvency. Financial ratios are crucial for investors, analysts, and managers as they help assess a company's strengths and weaknesses relative to its competitors.

Example

An investor uses the P/E ratio to determine if a stock is overvalued or undervalued compared to its earnings, guiding their investment decisions.

Key points

• Derived from financial statements to evaluate company performance.

• Common ratios include P/E, debt-to-equity, and ROE.

• Used by investors, analysts, and managers for decision-making.

Quick Answers to Curious Questions

They provide a quick assessment of a company’s financial health, aiding in comparative analysis.

It indicates how much investors are willing to pay per dollar of earnings, reflecting market expectations.

They show a company’s ability to meet short-term obligations, influencing credit and operational decisions.

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