Financial Performance Ratios is used to depict the performance of a business. These ratios are derived from the items of a financial statement. To derive a financial ratio, one variable of the financial statement is divided by the other. It illustrates the relationship between two financial variables. A financial ratio is an important tool for small business firms and managers to measure the progress for achieving the targeted goals. Some of the important financial ratios which a firm would like to analyze:
Liquidity Ratio
Liquidity Ratio describes the current ability of the firm to meet its short-term requirement. These ratios measure the availability of cash in an organization.
Current Ratio= Current Assets/Current Liabilities
Current assets include those assets that can be converted to cash within one year. This ratio measures the firm’s short-term solvency.
Quick Ratio= Current Assets- Inventories/Current Liabilities
Also known as Acid Test ratio.
Cash Ratio= Cash + Marketable Securities/Current Liabilities
This ratio indicates the quick requirement of cash to meet the short-term liabilities.