Financial ratios can be a relatively easy way to assess various aspects of a company's performance. Spanning profitability, liquidity, efficiency, stability and valuation, many of these ratios are very common, and when the results of these ratios are compared to other companies in the sector, or on the same company over time, they can be a simple yet powerful tool in uncovering the underlying progress of the company against peers. This tutorial will look at three efficiency ratios and three liquidity ratios; liquidity ratios look at the ability of a company to pay its short-term liabilities. This tutorial will cover those that are most easy to calculate given the information required is commonplace in financial statements.
Financial ratios are most useful when comparing like-for-like companies. For these ranges of efficiency and liquidity ratios we will look at two companies that are very similar in terms of operation: Boohoo (LSE:BOO) and ASOS (LSE:ASC). Both of these companies is involved in the production, distribution and sale of clothing solely through online websites, on a global scale. I will demonstrate how to calculate each of these ratios for Boohoo and then compare it with the figure for ASOS. We will use the 2014 results for Boohoo, which can be found here.
Ratios 1 to 3 cover efficiency ratios. Ratios 4 to 6 cover liquidity ratios.