Financial ratios are relationship and proportions between different items of data (both financial and non-financial) that can provide any insight into any aspect of a company's business. Some financial ratios such as current ratio, net profit margin, etc. are relevant to all companies and are hence widely used. Others are used either in a specific industry or for some very specific purpose of advanced nature such as valuation.
Industry Specific Ratios
Industry-specific ratios are ratios that are useful only in a specific industry and hence calculated for analyzing entities in that industry only. These ratios are meaningless for entities in other industries. These include:
- Occupancy ratio for hoteling industry
- Capital adequacy ratio for banks
- Monetary reserve requirement for banks
- Sales per square foot for companies in retail business
- Revenue per employee for service companies
Valuation ratios express relationships between share price of a company and some of the entity's other key statistics. For example price to book value per share, price to cash flow per share, etc. Such ratios are used to value a company's share relative to the value of another similar company.
Written by Obaidullah Jan, ACA, CFAhire me at