Ratio Analysis

Written By
Paul Tracy
Updated November 4, 2020

What is Ratio Analysis?

Ratio analysis is the exercise of calculating various pieces of financial data in relation to one another.

How Does Ratio Analysis Work?

There are dozens of financial ratios out there. In fact, there are too many to list here in this definition. Some examples of ratios used in financial ratio analysis include the price-to-sales ratio:

Price-to-Sales Ratio = Market Capitalization/Annual Sales


Price-to-Sales Ratio = Share Price/Revenue per Share

One of the most famous ratios in finance is the P/E ratio, which is price per share/earnings per share.

The formula for the PEGY ratio is:

PEGY = P/E Ratio/(Earnings Growth Rate + Dividend Yield)

Why Does Ratio Analysis Matter?

Active investment strategies generally dismiss long-term trends and focus on short-term profits, whereas passive investors maintain that long-term price movements are important and often predictable. This is why active investors often use quantitative and technical analyses, including ratio analysis, 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 ratio analysis 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 Ratio Analysis.
Be the first to ask a question

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

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

By submitting this form you agree with our Privacy Policy

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