FREQUENTLY USED FINANCIAL RATIOS

LIQUIDITY RATIOS

Current Ratio

Formula: Current Ratio = Current Assets / Current Liabilities.

Measure: Company's ability to pay short-term liabilities.

Quick Ratio (Acid-Test Ratio)

Formula: Quick Ratio = (Current Assets - Inventory) / Current Liabilities.

Measure: Company's ability to convert current assets in cash in order to pay short-term liabilities.

Working Capital

Formula: Working Capital = Current Assets - Current Liabilities.

Measure: Company's short-term ability to support its business operations.

PROFITABILITY RATIOS

Gross Profit Margin

Formula: Gross Profit Margin = (Sales - COGS) / Sales.

Measure: Company's profitability after Cost of Goods Sold has been deducted from Sales (before operating expenses).

Net Profit Margin

Formula: Net Profit Margin = Net Profit / Sales.

Measure: Company's net profitability after all business expenses.

Return on Assets (ROA)

Formula: ROI = Net Profit / Total Assets.

Measure: Company's net profitability compared to all assets.

Return on Equity (ROE)

Formula: ROE = Net Profit / Shareholders Equity.

Measure: Shareholders earnings compared to shareholders equity.

Earnings per Share

Formula: Earnings per Share = Net Profit / # Shares.

Measure: Shareholders net profitability per share.

EFFICIENCY RATIOS

Inventory Turnover

Formula: Inventory Turnover = COGS / Inventory.

Measure: Company's ability to move inventory. The inventory level compared to COGS.

Days Inventory Outstanding

Formula: Days Inventory Outstanding = Inventory / (COGS / 365).

Measure: Number of days per average inventory cycle. How many days are required for the company to turn inventory.

Average Collection Period

Formula: Average Collection Period = AR / (Credit Sales / 365).

Measure: Average number of days the company needs to collect AR from customers.

Operating Cycle

Formula: Operating Cycle = Days Inventory Outstanding + Average Collection Period.

Measure: Company's overall ability to move inventory and collect payments.

Fixed Asset Turnover

Formula: Fixed Assets Turnover = Sales / Fixed Assets.

Measure: Company's ability to use its fixed assets to generate sales.

Total Asset Turnover

Formula: Total Assets Turnover = Sales / Total Assets.

Measure: Company's ability to use its total assets to generate sales.

Working Capital Turnover

Formula: Working Capital Turnover = Sales / Working Capital.

Measure: Company's ability to use its working capital to generate sales.

LEVERAGE RATIOS

Debt Ratio

Formula: Debt ratio = Total Debt / Total Assets.

Measure: The ratio of company's total assets financed by borrowed funds. 

Debt to Equity Ratio

Formula: Debt ratio = Total Debt / Total Shareholders Equity.

Measure: The ratio of total shareholders equity financed by borrowed funds. 

Times Interest Earned

Formula: Times Interest Earned = EBIT / Interest Charges.

Measure: Company's ability to pay interest expenses with the current level of business activities.