Financial Ratios


This page lists the most important financial ratios when analyzing financial statements, namely the Balance Sheet, and Income Statement.

Income Statement Ratios

Gross Profit Ratio

Gross Profit Ratio = Gross Profit / Total Revenue

Expressed as percentage

Show’s the proportion of profits prior to SG&A.

Operating Profit Ratio

Operating Profit Ratio = Operating Income / Total Revenue

Expressed as percentage

Show’s how much the company makes after paying for variable costs of production┬ásuch as wages, raw materials, and others.

Net Profit Ratio

Net Profit Ratio = Net Income / Total Revenue

Expressed as percentage

Show’s how much net profit is generated as a percentage of net revenue.

Tax Ratio

Tax Ratio = Income Tax / Income Before Tax

Expressed as percentage

Interest Coverage Ratio

Interest Coverage Ratio = Interest Expense / Operating Income

Expressed as number with one decimal

SG&A Ratio

SG&A Ratio = Selling/General/Administrative Expenses / Total Revenue

Expressed as percentage

R&D Ratio

R&D Ratio = Research & Development / Total Revenue

Expressed as percentage

Dep. & Amort. Ratio

Dep. & Amort = Depreciation/Amortization / Total Revenue

Expressed as percentage

Unusual Expenses Ratio

Unusual Expense Ratio = Unusual Expenses (Income) / Total Revenue

Expressed as percentage

Other Ratio

Other Ratio = Other Operating Expenses / Total Revenue

Expressed as percentage

Interest Ratio

Interest Ratio = Interest Expense / Total Revenue

Expressed as percentage

Extraordinary Items Ratio

Extraordinary Items Ratio = Extraordinary Items / Total Revenue

Expressed as percentage

Balance Sheet Ratios

Quick Ratio (Acid Test Ratio)

Quick Ratio = (Total Current Assets Inventories) / Total Current Liabilities

Expressed as number with one decimal

A ratio to determine the short-term liquidity without calculating the inventories (as these might take time to sell, or can’t be sold for the full value).

A general good ratio is 1:1 but it depends on the industry.

Current Ratio

Current Ratio = Total Current Assets / Total Current Liabilities

Expressed as number with one decimal

A ratio to determine the short-term liquidity. It takes into account:

  • Accounts receivable
  • Inventory
  • Cash
  • Prepaid expenses

A general good ratio is 2:1 but it depends on the industry.

Total Asset Turnover Ratio

Total Asset Turnover Ratio = Total Revenue / Total Current Assets

Expressed as number with one decimal

This ratio shows:

  • How efficient the company is using it’s assets to generate revenue.
  • How much revenue does the company generate for each 1 dollar of assets?

Net Asset Turnover Ratio

Net Asset Turnover Ratio = Total Revenue / (Total Assets Current Liabilities)

Expressed as number with one decimal

This ratio shows (without counting current liabilities, as paid off within a year):

  • How efficient the company is using it’s assets to generate revenue.
  • How much revenue does the company generate for each 1 dollar of assets?

Efficiency Ratios

Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Revenue / Inventories

Expressed as number with one decimal

Inventory Days

Inventory Days = (Inventories * 365) / Cost of Revenue

Expressed as number with one decimal

Accounts Receivable Ratio

Accounts Receivable Ratio = Total Revenue / Accounts Receivable

Expressed as number with one decimal

Accounts Receivable Days

Accounts Receivable Days = (Accounts Receivable * 365) / Total Revenue

Expressed as number with one decimal

Accounts Payable Ratio

Accounts Payable Ratio = Cost of Revenue / Accounts payable

Expressed as number with one decimal

Accounts Payable Days

Accounts Payable Days = (Accounts Payable * 365) / Cost of Revenue

Expressed as number with one decimal

PP&E Turnover Ratio

PP&E Turnover Ratio = Total Revenue / Property, plant and equipment

Expressed as number with one decimal

Working Capital Turnover

Working Capital Turnover = Total Revenue / ((Accounts Receivable + Inventories) Accounts Payable)

Expressed as number with one decimal

Cash Turnover

Cash Turnover = Total Revenue / Cash

Expressed as number with one decimal

Leverage & Solvency Ratios

Debt to Equity

Debt to Equity = Debt / Shareholder’s Equity

Expressed as a percentage

If the ratio is higher than 100% then more funding comes from debt, rather than equity.

Debt to Capital

Debt to Capital = Debt / (Debt + Shareholder’s Equity)

Expressed as a percentage

If the ratio is higher than 100% then more funding comes from debt, rather than equity.

Debt to Tangible Net Worth

Debt to Tangible Net Worth = Debt / (Shareholder’s Equity Goodwill and intangible assets)

Expressed as a percentage

A ratio of 1 would be best, but if it’s greater than 1, then it is necessary to check how the company is managing its financing.

Total Liabilities to Equity

Total Liabilities to Equity = Total Liabilities / Shareholder’s Equity

Expressed as a percentage

Determines together with the debt to equity ratio, the impact of the operational liabilities on the business.

Total Assets to Equity

Total Assets to Equity = Total Assets / Shareholder’s Equity

Expressed as a percentage

If the ratio is low, the company might not be sufficiently leveraged. The higher the value, the higher leveraged, the company is.

Debt to EBITDA

Debt to EBITDA = Debt / (Operating Income + Depreciation/Amortization)

Expressed as a percentage

Assess the amount of leverage in relation to EBITDA. Depending on industry this can range from 1 to 5 times.

Capital Structure Impact

Capital Structure Impact = Income Before Tax / Operating Income

Expressed as a percentage

Acid Test

Acid Test = (Total Current Assets Inventories) / Total Current liabilities

Expressed as a percentage

Rates of Return

Return on Equity

Return on Equity = Net Income / Shareholder’s Equity

Expressed as a percentage

Return on Assets

Return on Assets = Net Income / Total Assets

Expressed as a percentage

Chris

Chris is an IT Project Portfolio Manager within the financial industry. Due to the nature of his role, he is engaged to study Financial Markets and is an active investor.

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