Identification

• Financial ratios are categorized according to the type of information that is provided. The calculations are usually related to operational efficiency, credit service or business valuation.
  
  

Sales and Profitability

• Asset turnover, inventory turnover, gross margin, profit margin and return on equity are separate ratios related to the corporation's ability to make sales and turn profits. Weak sales and profitability ratios often signal that the business is struggling.
  
  

Debt Management

• Debt, debt to equity, times interest earned and debt service coverage ratios measure the company's debt levels and its ability to make payments. High debt ratios indicate that the business is highly leveraged and must grow profits quickly to reduce liabilities.
  
  

Valuation

• Earnings per share, price to earnings, price to sale and dividend yields are attributable to equity investment. These ratios indicate the amount of profits and dividends that are associated with one share of stock.
  
  

Decision Making

• Financial ratios influence shareholder, management and lender behavior by exposing the strengths and weaknesses of various businesses. Decision makers use the information to analyze patterns that are related to specific firms and the overall economy, prior to investing capital.