In this article, we will take a look at the 12 most important financial ratios to analyze a company. If you want to skip our detailed analysis, you can go directly to 5 Most Important Financial Ratios to Analyze a Company.
Artificial Intelligence is Making Financial Analysis Easier
While financial ratio analysis is highly expensive, if services are outsourced to consulting companies, several startups are making the job slightly easier for companies. One such startup is DataRails. DataRails is a software development company based in New York, United States. The company specializes in providing financial planning and analysis platforms for users. The company's FP&A software allows finance experts to conduct financial planning, financial analysis, budgeting, and forecasting.
On July 19, DataRails announced the complete rollout of its FP&A platform. The platform is also called the "ChatGPT" for the chief financial officer. The generative AI tool can offer comprehensive insights into a company's financial performance, budgets, forecasts, variance, and spending. The company's main features are fast finance requests, executive self-service, and AI storytelling. The tool allows users to gain instantaneous insights into their financial data, allowing them to focus on achieving long-term goals instead. The tool also allows users to ask detailed questions about the data. Moreover, using simple commands, users can transform extensive financial data into actionable items and comprehensive stories. The tool connects and syncs all spreadsheets and datasets provided by the company.
Prominent Companies That Provide Financial Consulting
Financial ratios are an integral component and assessor of a firm's future strategies. Some of the most prominent companies offering financial consulting include Verisk Analytics, Inc. (NASDAQ:VRSK), FTI Consulting, Inc. (NYSE:FCN), and Resources Connection, Inc. (NASDAQ:RGP). These companies assess the financial performance of companies and guide the way forward to improve key ratios and manage risk.
Verisk Analytics, Inc. (NASDAQ:VRSK) is a data analytics and risk assessment company based in New Jersey, United States. The company uses artificial intelligence and machine learning tools to analyze a company's performance. The diverse portfolio of the company is indicative of its financial performance. On November 1, Verisk Analytics, Inc. (NASDAQ:VRSK) reported earnings for the fiscal third quarter of 2023. The company reported earnings per share of $1.52, beating estimates by $0.05. The company also reported revenue worth $677.60 million during the quarter, ahead of market consensus by $14.79 million.
FTI Consulting, Inc. (NYSE:FCN) is a leading business consultancy firm based in Washington, United States. The company specializes in providing corporate finance, economic consulting, forensic and litigation consulting, and strategic communications and technology solutions. On November 6, FTI Consulting, Inc. (NYSE:FCN) announced the opening of an office in the Qatar Financial Centre (QFC) in Doha. The new office will allow the company to offer services to clients in Qatar, the wider Gulf Cooperation Council, and international companies. The company will provide key solutions in business advisory, public and private sector strategy, cybersecurity, consulting, corporate finance, dispute resolution, and digital investigations.
Resources Connection, Inc. (NASDAQ:RGP) is a prominent consulting company based in California, United States. The company continues integrating tech solutions to provide enhanced services to its clients. On November 15, Resources Connection, Inc. (NASDAQ:RGP) announced the completion of its acquisition of CloudGo Pte Ltd. CloudGo Pte Ltd is a digital transformation business and will collaborate with RGP's Veracity business to provide digital consulting solutions and services across the Asia Pacific region. Through the platform, clients can gain access to complete consulting solutions offered by Resources Connection, Inc. (NASDAQ:RGP).
12 Most Important Financial Ratios to Analyze a Company
12 Most Important Financial Ratios to Analyze a Company
Our Methodology
We employed a consensus approach for coming up with the 12 most important financial ratios to analyze a company. Since it is a very subjective topic, it was quite challenging to rank our list. We sourced our data from 4 sources. These include Trade Brains, Investing Answers, Tutor Pace, and Investy Wise. Extracting information from all 4 sources brought our total count to 20. Of the 20, the common financial ratios were selected and ranked based on the number of times an item appeared across the 4 sources. If an item appeared in all four sources, it was awarded with an insider monkey score of 4. The list is in ascending order of the number of mentions across all four sources. It is to be noted that items with similar scores are ranked back to back in our list. Additionally, we have provided details on the importance of each ratio.
12 Most Important Financial Ratios to Analyze a Company
12. Return on Assets Ratio (ROA)
Number of Mentions: 3
According to our methodology, the return on assets ratio (ROA) is one of the most important financial ratios to analyze a company. The return on assets ratio (ROA) is a measure of how well a company is able to convert its assets to profit. The return on assets ratio (ROA) is calculated by dividing the net income of a company by its total assets for a certain fiscal period. The profitability ratio is a strong indicator of how well the company is utilizing its resources and assets to earn a profit. While the ideal return on assets ratio (ROA) may vary across industries, a ratio above 5% is considered to be good, while one higher than 20% may be considered excellent.
Verisk Analytics, Inc. (NASDAQ:VRSK), FTI Consulting, Inc. (NYSE:FCN), and Resources Connection, Inc. (NASDAQ:RGP) provide financial consulting services to companies and organizations.
11. Price to Sales Ratio (P/S)
Number of Mentions: 3
The price-to-sales ratio (P/S) is an important financial ratio to analyze a company's financial performance. The price-to-sales ratio (P/S) is an indicator of a company's stock price against its revenue. The price-to-sales ratio (P/S) ratio is calculated by dividing the market capitalization by the annual sales revenue for a certain fiscal period. The price-to-sales ratio (P/S) indicates how much a market values every dollar of the company's sales. It is also an important measure for inventors willing to know how much they are actually investing in a company. The lower the P/S ratio, the more attractive it may be for an investor.
10. Dividend Yield Ratio
Number of Mentions: 3
According to our methodology, the dividend yield ratio is one of the most important financial ratios to analyze a company. The dividend yield ratio indicates how much a company pays out in dividends each year against its market value per share. The dividend yield ratio is calculated by dividing the annual dividends per share by the price per share. Usually, the ratio is expressed as a percentage by multiplying the ratio by 100. The dividend yield ratio may indicate how efficiently a company distributes its profit to its shareholders. A high dividend ratio may be attractive for shareholders. Additionally, it is also a strong indicator of a stock's income potential for investors.
9. Price to Earnings Ratio (P/E)
Number of Mentions: 3
The price-to-earnings ratio (P/E) is one of the most important financial ratios to analyze a company. The ratio is commonly used as a measure of a company's value. The price-to-earnings ratio (P/E) is calculated by dividing the market share price by the earnings per share (EPS) of a company for a certain fiscal period. A high P/E ratio suggests that a company's stock price is high against its earnings, and vice versa for a low P/E ratio. The P/E ratio is an indicator of how much the market is willing to pay for a stock based on its earnings. A high P/E ratio hints towards a stock being overvalued.
8. Inventory Turnover Ratio
Number of Mentions: 4
According to our methodology, the inventory turnover ratio is one of the most important ratios to analyze a company's performance. The inventory turnover ratio is a measure of how quickly the inventory of a company is being sold, replaced, or used. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory for a certain fiscal period. An inventory turnover ratio between 5-10 may suggest that the company is able to sell its inventory within 1 to 2 months. A low inventory turnover ratio may indicate that the company's sales are weak or the demand for the product is declining. It is to be noted that the ideal inventory turnover ratio may vary from industry to industry.
7. Asset Turnover Ratio
Number of Mentions: 4
The asset turnover ratio is one of the most important financial ratios to analyze a company. The assets turnover ratio is a measure of how effectively a company can generate sales using its assets. The ratio is calculated by dividing the net sales of a company by its net fixed assets for a certain fiscal period. An asset turnover ratio above 1 suggests that a company is utilizing its assets properly to generate sales. On the other hand, a low asset turnover ratio indicates that a company's assets are sitting idle and are not being used efficiently.
6. Interest Coverage Ratio
Number of Mentions: 4
According to our methodology, the interest coverage ratio is one of the most important financial ratios to analyze a company. The interest coverage ratio is a measure of a company's profitability and its ability to pay interest on its outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense for a certain fiscal period. The higher the interest coverage ratio, the more reliable, less risky, and consistent a business is. It is also an important ratio investors consider before they decide to invest in a company.
Verisk Analytics, Inc. (NASDAQ:VRSK), FTI Consulting, Inc. (NYSE:FCN), and Resources Connection, Inc. (NASDAQ:RGP) provide comprehensive risk mitigation strategies after analyzing the financial performance of organizations.
