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.