Financial ratios

Financial ratios involve comparing different aspects of a personal, business, or country’s financial data. There are ratios that work to compare just about anything, but the primary movers are debt, income, capacity, liquidity, and leverage. You can combine just about any two of those and come up with something meaningful, if only a way to measure one against the other.

For example, the federal government regulates the percentage of total capital a bank must keep as available liquid assets. This number is one of the most basic financial ratios and it is derived by taking a percentage of total deposits to reach your required cash reserves number. The idea is that one simple number can be used to calculate another, useful number.

Other financial ratios are used by companies to measure well being and stability, rather than by government agencies. The ratio of a company’s debt to income is a good indication of profitability. The income alone for a company can seem huge, but if the company is in heavy debt, then those profits are overshadowed by the money the company already owes.