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Financial Ratios Explained: What They Are and Why They Matter

30 May 2024

Editor: ET


Understanding financial ratios is crucial for any business aiming to achieve long-term success. Financial ratios provide insight into various aspects of a company’s performance, such as profitability, liquidity, efficiency, and solvency.

This article, with insights from Expede.com.sg, will explain what financial ratios are, why they matter, and how they can be applied to businesses in Singapore.


What Are Financial Ratios?

Financial ratios are numerical values derived from a company’s financial statements. These ratios are used to evaluate the overall financial health of a business. By analyzing different financial ratios, business owners and investors can make informed decisions about investments, operations, and strategic planning.


Key Types of Financial Ratios


1. Profitability Ratios

Profitability ratios measure a company’s ability to generate profit relative to its revenue, assets, or shareholders' equity. Common profitability ratios include:

  • Gross Profit Margin: (Gross Profit / Revenue) x 100

  • Net Profit Margin: (Net Profit / Revenue) x 100

  • Return on Assets (ROA): Net Income / Total Assets

  • Return on Equity (ROE): Net Income / Shareholders' Equity


Expede.com.sg Insight: Regularly monitoring profitability ratios can help businesses assess their efficiency in generating profits and identify areas for improvement.


2. Liquidity Ratios

Liquidity ratios assess a company’s ability to meet its short-term obligations. Key liquidity ratios include:

  • Current Ratio: Current Assets / Current Liabilities

  • Quick Ratio: (Current Assets - Inventory) / Current Liabilities


Tip from Expede.com.sg: Maintaining healthy liquidity ratios ensures that your business can comfortably cover its short-term debts and avoid financial distress.


3. Efficiency Ratios

Efficiency ratios evaluate how effectively a company uses its assets and manages its operations. Important efficiency ratios include:

  • Inventory Turnover: Cost of Goods Sold / Average Inventory

  • Accounts Receivable Turnover: Net Credit Sales / Average Accounts Receivable


Expede.com.sg Recommendation: Improving efficiency ratios can lead to better cash flow management and reduced operational costs.


4. Solvency Ratios

Solvency ratios measure a company’s ability to meet its long-term debts and obligations. Notable solvency ratios include:

  • Debt to Equity Ratio: Total Debt / Total Equity

  • Interest Coverage Ratio: EBIT / Interest Expense


Pro Tip: Maintaining strong solvency ratios is crucial for long-term financial stability and attracting investment.


Why Financial Ratios Matter

Financial ratios are vital tools for several reasons:

  • Performance Assessment: They provide a clear picture of a company’s financial health and operational efficiency.

  • Comparative Analysis: Ratios allow for benchmarking against industry standards and competitors.

  • Investment Decisions: Investors use financial ratios to evaluate the viability and profitability of their investments.

  • Strategic Planning: Business owners can use ratio analysis to inform strategic decisions and identify growth opportunities.


Applying Financial Ratios in Singapore

For businesses in Singapore, understanding and applying financial ratios is essential for navigating the competitive landscape. Utilizing these ratios can help identify strengths, weaknesses, and areas for improvement, ultimately leading to better financial management and growth.


Expede.com.sg Advice: Regularly review your financial ratios and consult with financial experts to ensure you are making informed business decisions.


Financial ratios are powerful tools that offer valuable insights into a company’s financial performance. By understanding and regularly analyzing these ratios, businesses in Singapore can enhance their decision-making processes, improve operational efficiency, and achieve long-term success. For expert guidance on financial management and business advisory services, visit Expede.com.sg.

About Expede.com.sg: Expede.com.sg provides comprehensive business advisory services, helping Singapore businesses with financial planning, compliance, and strategic growth.

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