Key Ratio

In order to get a clear picture of the current financial position of a company a tool that is used is called key ratio. It is a ratio that gives us a clear idea about the financial status of a business or an organization. A high value of ratio indicates that the company is financially superior and stable as compared to those companies having low key ratios. There are number of different types of key ratios used to determine the financial condition of a company. These ratios include

  • Asset Productivity Ratio
  • Financial Strength Ratio
  • Profitability Ratio
  • Valuation Ratio

Asset Productivity Ratios

This group of key ratios describes how effectively and efficiently the assets of a company are being used to yield profit. This includes ratios that manage inventory, account receivable and fixed assets.

Financial Strength Ratio

These ratios are used to find out the extent to which the company resources are provided by creditors and sources other than owners. These ratios indicates the ability of a company to pay back its creditors

Profitability Ratio

This ratio is also called management effective ratio and indicates how profitable a company is for its creditors and shareholders.

Valuation Ratios

It is the measure of the value of the stock price of a company. It is a ratio that shows a relation between the stock price values of a company to its performance.

Ratios are great tools to measure the financial status of the company however it must be kept in mind that these are only tools and not the actual substitute of practical judgment.


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