Financial Ratios

Financial Ratios Financial ratios appear on virtually every Series 65 exam — expect 2–4 questions in Section I that test your ability to identify, calculate, and interpret the most common ratios used to evaluate a company's financial health. --- ## Why Financial Ratios Matter Investment advisers must be able to assess whether a company is financially sound before recommending its securities to clients. Financial ratios distill raw numbers from income statements and balance sheets into meaningful comparisons — making it easier to evaluate profitability, liquidity, leverage, and valuation across companies or over time. --- ## Categories of Financial Ratios The Series 65 focuses on four broad categories of ratios: | Category | What It Measures | Key Ratios | |---|---|---| | Valuation | What the market pays relative to earnings/book value | P/E Ratio | | Liquidity | Ability to meet short-term obligations | Current Ratio, Quick Ratio | | Profitability | How efficiently a company generates earnings | Return on Equity (ROE) | | Leverage | How much debt is used relative to equity | Debt-to-Equity Ratio | --- ## Key Ratios Explained ### Price-to-Earnings (P/E) Ratio Formula: Market Price per Share ÷ Earnings per Share (EPS) The P/E ratio tells you how much investors are willing to pay for each dollar of a company's earnings. A higher P/E suggests investors expect strong future growth; a lower P/E may indicate a value opportunity — or a struggling business. > Example: A stock trades at $50 per share and has EPS of $5. P/E = 50 ÷ 5 = 10x. Investors are paying $10 for every $1 of earnings. The P/E ratio is also used as an equity valuation…