Companies normally use ratios to judge its performance for current year by comparing with previous years. The ratios used are usually current ratio, net profit ratios, price earning ratio, earning per share, etc.

current ratios is the quotient of current assets divided by current liabilities. It shows the capability of a company to pay its debt over one year. The higher the current ratio, it’s more able for a company to pay its obligations. In addition, if any company has a current ratio that is below 1, it is a warning that the company is not in a safe situation.

Net profit ratio is calculated as the formula: net profit/ net sales* 100. It displays the capital left after paying expenses, so the larger the net profit ratio, more stable the business will be.

Earning per share illustrates the profitability per shareholder; thus, it’s a key factor to determine the share price, and this is an important component to calculate the price earning ratio.

Price earning ratio is calculated by dividing earning per share from market price. It shows how much a shareholder is willing to pay when they earn one dollar, and can reflect the potential dividend will gain for the business. The higher the P/E ratio is, the greater value creation for future.

(Source is provided by http://www.investopedia.com)