financial ratio

Dictionary of Accounting Terms for: financial ratio
financial ratio

mathematical relationship between one quantity and another. There are many categories of ratios such as those that evaluate a business entity’s liquidity, solvency, return on investment, operating performance, asset utilization, and market measures. An example of a ratio is the earnings yield that equals dividends per share divided by market price per share. While the computation of a ratio is a basic arithmetical operation, its analytical interpretation is more complex. A financial ratio should be computed only if the relationship between accounts or categories has significance. The financial ratio may provide the accountant with clues and symptoms of underlying financial condition. To be meaningful, a given financial ratio of a company for a given year must be compared to (1) prior years to examine the trend, (2) industry norm, and (3) competing companies.

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