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title: What Are Financial Ratios and Why Are They Important?

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# What Are Financial Ratios and Why Are They Important?

![](https://i.imgur.com/YqN6Q6F.jpg)

Financial ratios are used to help you make decisions about your business. For example, they can be helpful when trying to figure out which parts of your company are performing well and which aren't, as well as how much money each of those areas is bringing in compared to others. Financial ratios can also help you determine whether or not it's time to increase (or decrease) prices on certain products or services--and also show if any problems with profits or expenses need fixing immediately.

## What Are Financial Ratios?

[Financial ratios](https://www.evolvetogrow.com.au/resources/six-financial-ratios-every-business-owner-should-use) are measures of financial performance. They can be used to compare the performance of different companies or the performance of a company over time, and investors often use them to determine how efficient and effective a company's management is at managing its assets.

Financial ratios help investors understand how well each part of a business is performing relative to one another. Hence, they have an idea about whether there might be areas where improvement would be beneficial for future growth potential or financial health stability.

## Why Are Financial Ratios Important?

Financial ratios are useful because they allow you to analyze a business's financial health. A good financial ratio should tell you how well your company is doing compared to its competitors and how it has performed over time.

Financial ratios can be used in many situations:

* To determine whether or not a company is financially healthy (by comparing its performance against other companies).

* To assess how an individual business performs relative to other firms within their industry and/or region. For example, if one person asks me if I think their business will grow this year, I might look at their previous five years' worth of financials--which includes all kinds of data such as sales figures and profit margins--to see if any red flags would suggest otherwise (i.e., high debt levels).

## Help You Make Better Decisions

Financial ratios measure a company's financial health by comparing its assets, liabilities and equity. For example, if a company has more assets than it owes (Assets > Liabilities), it has excess cash. On the other hand, if the opposite is true--that is, Liabilities exceed Assets--it means that the business needs more money than they have available to meet its obligations.

Financial ratios can also be used to compare companies within the same industry. For example, if one company has higher profit margins, then another may have lower profit margins but still generate more sales per dollar spent on advertising efforts or product development costs; this could indicate that they're doing better at managing their business without having too much debt hanging around their necks (which would cause them problems later down the road).

## Conclusion

Financial ratios are one of the best tools for understanding your company's financial performance. They can help you make better decisions, identify areas where you need to improve and plan for the future. However, there are many different ratios, and it can be challenging to understand them independently. We hope this article has given you an overview of financial ratios and how they work. Please get in touch with us if there is anything else we can do!
