Financial Ratios are quantitative tools used to evaluate a companyís financial health, operational efficiency, profitability, and overall performance. They are derived from data available in financial statements such as the balance sheet, income statement, and cash flow statement. By comparing different elements of financial data, investors, analysts, and management can assess how effectively a company is using its resources and managing its finances.

Broadly, financial ratios are classified into several categories based on their purpose. The major types include:

1. Liquidity Ratios: These measure a companyís ability to meet short-term obligations. Common examples are the Current Ratio and Quick Ratio. A higher ratio indicates better short-term financial stability.

2. Profitability Ratios: These assess a firmís ability to generate profit relative to sales, assets, or equity. Examples include Net Profit Margin, Return on Assets (ROA), and Return on Equity (ROE).

3. Leverage Ratios: Also known as solvency ratios, they measure the level of debt a company uses to finance its operations. The Debt-to-Equity Ratio and Interest Coverage Ratio are common examples.

4. Efficiency Ratios: These indicate how effectively a company uses its assets and liabilities. Examples include Inventory Turnover Ratio and Receivables Turnover Ratio.

5. Valuation Ratios: Used primarily by investors, these ratios help determine a companyís market value relative to its earnings or assets. Examples include the Price-to-Earnings (P/E) Ratio and Price-to-Book (P/B) Ratio.

Analysts use financial ratios to track performance trends over time and to compare companies within the same industry. However, ratios should not be interpreted in isolation; external factors like market conditions, industry norms, and company size must also be considered.

In summary, financial ratios are vital analytical tools that provide insights into a companyís liquidity, profitability, efficiency, and solvency. They support better decision-making for investors, creditors, and management by translating complex financial data into meaningful performance indicators.