Key Ratio

Written By
Paul Tracy
Updated November 4, 2020

What is a Key Ratio?

A key ratio is any financial ratio that is especially important, prevalent, or necessary in analyzing a company's performance in relation to other companies, the industry or the market.

How Does a Key Ratio Work?

Key ratios calculate various pieces of financial data in relation to one another. There are dozens of financial ratios out there, and what is "key" is usually a matter of opinion and tradition. In fact, there are too many important ratios to list here in this definition. Some examples of key ratios might be the price-to-sales ratio (Price-to-Sales Ratio = Market Capitalization/Annual Sales) or the P/E ratio, which is price per share/earnings per share. Other key ratios include return on assets, return on equity, or price to book value.

The idea is that managers can rely on key ratios for instant snapshots and analysis of the condition of the business. Analysts use these same sets of ratios to compare companies.

Why Does a Key Ratio Matter?

Investors often use quantitative and technical analyses, including key ratios, stock chart analysis and other mathematical measures to determine whether to buy or sell.

Regardless of the investment method, however, ratio analysis is crucial to understanding an investment. After all, it is through these key ratios that we detect whether a company is encountering difficulties paying the bills, taking too long to collect money from customers, unable to pay its debts, whether its stock is overpriced, and a wide variety of other insights. The mathematics typically only involve simple division, but the insights they yield can be invaluable.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Key Ratio.
Be the first to ask a question

If you have a question about Key Ratio, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Key Ratio, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Key Ratio

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms