financial ratios

Definition

Financial analysis comparisons in which certain financial statement items are divided by one another to reveal their logical interrelationships. Some financial ratios (such as net sales to net worth ratio and net income to net sales ratio) are called 'primary' because they indicate the fundamental causes underlying a firm's strengths and weaknesses. Others (such as current assets to current liabilities ratio, and current liabilities to net worth ratio) are called 'secondary' because they depict the firm's competitive position and financial structure as effects of the causes identified by the primary ratios. See also activity ratios, efficiency ratios, investment ratios, leverage ratios, liquidity ratios, and profitability ratios.