Ratio Analysis: Meaning, Types of Ratios with Formulae
Written by Mariyam Sara
2 min read | Updated on October 09, 2025, 17:59 IST
What is ratio analysis?
How ratio analysis works
Types of Ratio Analysis
Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.
Ratio analysis is an important element of fundamental analysis. It helps you assess the financial strength of the company. You can use ratios to perform peer analysis and decide which company you should invest in.
In this blog, you will understand what ratio analysis is, how it works, its benefits, and the types of ratios you need to know as an investor.
What is ratio analysis?
Ratio analysis is a method of evaluating a company’s financials using ratios related to four important elements of any company: Profitability, liquidity, solvency, and efficiency. These ratios are calculated by using the data given in the financial statements of the companies, and help investors analyse them.
How ratio analysis works
Ratios are a snapshot of the company’s financial position. In ratio analysis, the data from a company's financial statements are converted to ratios to show the relationship between different financial components. You can use ratios to compare a company with its peers or the industry, making informed investment decisions.
Types of Ratio Analysis
The following are the types of ratio analysis
Liquidity Ratio
Liquidity ratios indicate a company’s ability to meet its short-term capital requirements. They are future divided into:
- Current Ratio
Current ratios represent the firm’s ability to meet its short-term requirements using its short-term assets. Ideally, the firm should have more current assets than current liabilities, hence a ratio of 2:1 is considered favorable.
Formula: Current Assets / Current Liabilities.
- Quick Ratio
The quick ratio excludes inventory and prepaid expenses from the current assets, giving a precise measure of liquidity.
Formula: (Current assets - Inventory - prepaid expenses) / Current Liabilities.
Profitability Ratio
Profitability ratios show a firm’s ability to generate profit in relation to its revenue, assets, and liabilities. Profit is the remaining portion of revenue after subtracting the cost of goods sold (COGS).
- Gross profit margin
Formula: (Revenue - COGS) / Revenue x 100
- Net profit margin
Formula: (Net income / Revenue) x 100
- Return on Equity
Formula: (Net income / Shareholders’ equity) x 100.
Efficiency Ratio
Efficiency ratios represent the efficiency of a firm in using its assets and resources to generate profits. The solvency ratio is divided into two:
- Inventory Turnover Ratio
This ratio represents the number of times a company sells and replaces its inventory within a specific time period.
Formula: Cost of goods sold (COGS) / Average inventory
- Accounts receivable turnover ratio
This ratio measures the efficiency of a company in collecting payments from its customers.
Formula: Net Credit Sales / Average accounts receivable.
Solvency Ratio
Solvency ratios show whether a company can fulfil its long-term loans and other financial obligations. The solvency ratio helps assess a firm’s ability to repay its debt obligations. There are two subtypes of solvency ratio:
- Debt-to-equity ratio
This shows the balance between the company’s assets and the loans it has. A high debt-to-equity ratio means the company may face difficulty in paying off its loans. A ratio of 1:1 to 2:1 is considered favorable.
Formula: Total debt / shareholders' equity
- Interest coverage ratio
The interest coverage ratio measures the ability of a firm to pay interest payments on loans taken. The ratio compares the firm’s earnings before interest to its interest expenses. An interest coverage ratio of more than 2:1 is considered ideal.
Formula: EBIT / Interest ratio
If analyzing a company’s financial statements isn't your cup of tea, you can use these ratios to make investment decisions. To start your investment journey, sign up on UpLearn by Upstox today!
About Author
Mariyam Sara
Sub-Editor
holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.
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