Many industries and jobs use ratios, but few industries rely as heavily on ratios as banking and finance. From credit counselors to mortgage brokers, stock brokers, retail banks, auto finance officers or commercial lenders — all things finance-related rely heavily on ratios. Here are some common financial jobs that use ratios and examples of the ratios they rely on.
Stock analysts evaluate publicly traded companies and make recommendations to investors and brokers based on their analysis. Ratios are widely used to analyze the health and value of companies. An example of a common ratio used by stock analysts is the "Quick Ratio." The Quick Ratio analyzes the near-term cash flow position of the company. Analysts calculate the Quick Ratio by adding cash, marketable securities and accounts receivable, then dividing the sum by the amount of current liabilities. The higher the number, the more near-term liquidity the company is thought to have.
The average investor is a little less likely to analyze a Quick Ratio, but she is very likely to look at a P/E or "Price to Earnings" ratio. P/E ratio is one of the most fundamental tools used to evaluate stock prices. Investors first determine a company's earnings per share. They take the earnings for the most recent quarter and divide that number by the number of shares outstanding. Then, they look at the current trading price of the stock: the price per share. When they divide the company's earnings per share with their current price per share, the quotient is the company's price to earnings ratio. This ratio gives investors an "apples-to-apples" comparison of the earnings for different sized companies.
Non-commercial bankers are often thought of as retail bankers. They are the bankers you would apply for a loan with at your local bank. Most retail loans use several ratios. The bankers are seldom concerned with what you're going to do with the money. Instead, they want to know how you're going to pay the money back from the income you currently earn. So, they use a "debt ratio" that looks at the monthly payment a borrower is required to pay for his loan. Then they divide the borrower's monthly income by the sum of payments made to service all of his debt. Lenders generally have a limit to how much they will lend a borrower based on the percentage of their monthly income that goes to repay loans.
Real Estate Lenders
Lenders who lend money for the purchase of real estate (mortgages) are concerned with more than your debt ratio. They are going to use the real estate as collateral for their loan by attaching a lien to the collateral. So, they need to know how much the collateral is worth in relation to the amount of money they are lending. This is called "LTV" or "Loan-to-value" ratio. The smaller the loan in relation to the value of its collateral, the safer the lender is in making the loan.