Financial Ratios & Categories
What Are Financial Ratios?
Financial ratios are analytical tools used to evaluate the relationship between key numerical values found in a company's financial statements. These ratios help investors, analysts, and managers assess a company’s performance, financial health, and operational efficiency.
Ratios can be expressed in various formats:
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As a decimal (e.g., 0.20)
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As a percentage (e.g., 20%)
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As a multiple (e.g., a P/E ratio of 15x)
When a ratio exceeds 1 and is used in a comparative context, such as price-to-earnings (P/E) or enterprise value-to-EBITDA, it is often referred to as a multiple.
Major Categories of Financial Ratios
Financial ratios are typically grouped into five core categories, each serving a specific purpose in financial analysis:
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Profitability Ratios
Measure a company’s ability to generate earnings relative to sales, assets, or equity.
Example: Net Profit Margin, Return on Equity (ROE)
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Cash Flow Ratios
Assess how well a company can generate and manage cash to meet obligations.
Example: Operating Cash Flow Ratio, Free Cash Flow to Equity
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Efficiency Ratios
Evaluate how effectively a company utilizes its assets and manages its operations.
Example: Inventory Turnover, Asset Turnover Ratio
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Valuation Ratios (Value Ratios)
Help determine a company's market value relative to financial metrics.
Example: Price-to-Earnings (P/E), Price-to-Book (P/B), EV/EBITDA
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Leverage Ratios
Analyze the degree of financial risk by measuring a company’s use of debt.
Example: Debt-to-Equity Ratio, Interest Coverage Ratio
Venture Capital (VC)
What is Venture capital?
Venture Capital, or VC, refers to a form of private equity financing provided by venture capital firms to high-potential, early-stage, or growth-stage startups. These firms invest in innovative businesses with strong growth potential, commonly in sectors such as technology, internet services, biotech, and clean energy. Venture capital is often the ideal funding solution for startups that are dynamic and promising, yet too small or too early-stage to access traditional capital markets.
Key Roles in a Venture Capital Firm
In addition to general management, VC firms consist of several specialized roles that contribute to deal sourcing, evaluation, and portfolio management:
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General Partners (GPs): Responsible for managing the fund. They typically earn an annual management fee of 1–2% of the fund’s total assets, plus a performance-based incentive (carried interest) of 10–20% of profits.
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Venture Partners: Not always full-time employees, but they help source and evaluate deals within their network or area of expertise.
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Principals: Senior team members with experience in finance or consulting. They often lead deal execution and due diligence.
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Associates: Junior-level professionals who support analysis, due diligence, and market research. Often seen as a training ground for future Principals.
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Entrepreneurs-in-Residence (EIRs): Industry experts brought in to evaluate opportunities and assist with due diligence. They may later lead a portfolio company or launch a startup with VC backing.
HEDGE FUNDS AT CROWDHOLDER
What are Hedge Funds?
Hedge funds are actively managed investment vehicles that pool capital from investors and aim to generate high returns through a variety of strategies across different markets and asset classes. Typically overseen by a fund manager or management team, hedge funds use a wide range of financial instruments—including stocks, bonds, derivatives, currencies, and commodities—to achieve their objectives.
While some hedge funds are open to new investors (provided they meet high minimum investment thresholds), others are closed or invite-only, often catering to accredited or institutional investors.
Key Characteristics of Hedge Funds:
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Flexible Strategies: Hedge funds can take both long and short positions, allowing them to potentially profit in both rising (bull) and falling (bear) markets.
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Use of Derivatives: Many hedge funds utilize complex instruments such as options, futures, and swaps to hedge risks or amplify returns.
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Market Volatility Advantage: Hedge funds often thrive on volatility, using sophisticated models and high-risk strategies to exploit short-term market movements.
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Exclusive Access: Due to their risk profile and regulatory structure, hedge funds generally require high minimum investments and may only be accessible to high-net-worth individuals or institutional investors.
Industry Growth:
In 2012, the global hedge fund industry was valued at approximately $2.13 trillion USD. By 2021, it had nearly doubled, reaching an estimated $4.0 trillion USD—reflecting its growing influence in the global financial system.
