These are the most important financial ratios formulas you can use to analyze any business:
- current ratio
- absolute ratio
- quick ratio
- the accounts receivable turnover ratio
- the accounts payable turnover ratio
- inventory turnover ratio
- debt to assets ratio
- debt to equity ratio
- interest coverage ratio
- gross profit margin ratio
- operating profit margin ratio
- return on capital employed ratio
- return on equity ratio
- Earnings Per Share
- Price/Earnings Ratio
What is a current ratio?
What is a quick ratio?
What is the absolute ratio?
What is the accounts receivable turnover ratio?
What is the accounts payable turnover ratio?
What is the inventory turnover ratio?
What is a debt to assets ratio?
What is a debt to equity ratio?
What is the interest coverage ratio?
What is a gross profit margin?
What is an operating profit margin?
What is a return on capital employed?
What is the return on equity?
What is the earning per share ratio formula?
This is given by:
(Net Income – Preferred Dividends) / Weighted Average Number of Common Shares
What is the price/earnings ratio formula?
This is given by:
(Net Income – Preferred Dividends) / Weighted Average Number of Common Shares
Financial Ratios Table
| Ratio | Type | Description | When to Use | Example | Formula |
|---|---|---|---|---|---|
| Price-to-Earnings (P/E) Ratio | Valuation | Measures a company’s current share price relative to its earnings per share (EPS). | Assess valuation and growth prospects. | A P/E ratio of 15 means investors pay $15 for every $1 of earnings. | P/E = Price per Share / Earnings per Share |
| Price-to-Sales (P/S) Ratio | Valuation | Compares a company’s market capitalization to its total sales revenue. | Evaluate valuation when earnings are not meaningful. | A P/S ratio of 1 indicates the company’s market cap is equal to its annual revenue. | P/S = Market Cap / Total Revenue |
| Price-to-Book (P/B) Ratio | Valuation | Compares a company’s market price per share to its book value per share. | Assess valuation relative to tangible assets. | A P/B ratio of 2 suggests the stock is trading at twice its book value. | P/B = Price per Share / Book Value per Share |
| Price/Earnings to Growth (PEG) Ratio | Valuation/Growth | Combines the P/E ratio with the expected earnings growth rate to assess valuation with growth prospects. | Evaluate valuation relative to expected growth. | A PEG ratio of 0.75 indicates potential undervaluation considering growth. | PEG = P/E Ratio / Earnings Growth Rate |
| Dividend Yield | Dividend | Measures the annual dividend income relative to the stock’s price. | Evaluate income potential from dividend stocks. | A 3% dividend yield means $3 in annual dividends for every $100 invested. | Dividend Yield = Annual Dividend per Share / Price per Share |
| Dividend Payout Ratio | Dividend | Shows the proportion of earnings paid out as dividends. | Assess sustainability of dividend payments. | A 50% payout ratio means half of earnings are distributed as dividends. | Payout Ratio = Dividends / Earnings |
| Debt-to-Equity Ratio | Solvency | Measures the proportion of a company’s debt to its equity. | Evaluate the financial risk and leverage. | A debt-to-equity ratio of 0.5 suggests moderate leverage. | Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity |
| Current Ratio | Liquidity | Compares a company’s current assets to its current liabilities. | Assess short-term liquidity and solvency. | A current ratio of 2 indicates good liquidity with twice as many assets as liabilities. | Current Ratio = Current Assets / Current Liabilities |
| Quick Ratio (Acid-Test Ratio) | Liquidity | Similar to the current ratio but excludes inventory from current assets. | Assess immediate liquidity without relying on inventory. | A quick ratio of 1 means current liabilities can be fully covered by liquid assets. | Quick Ratio = (Current Assets – Inventory) / Current Liabilities |
| Return on Equity (ROE) | Profitability | Measures a company’s profitability relative to shareholders’ equity. | Assess how efficiently equity is used to generate profits. | An ROE of 15% indicates a company generated a 15% return on shareholders’ equity. | ROE = Net Income / Shareholders’ Equity |
| Return on Assets (ROA) | Profitability | Measures a company’s profitability relative to its total assets. | Assess how efficiently assets are used to generate profits. | An ROA of 10% means a company earned a 10% return on total assets. | ROA = Net Income / Total Assets |
| Gross Margin | Profitability | Measures the percentage of revenue that remains after subtracting the cost of goods sold (COGS). | Assess a company’s ability to control production costs. | A gross margin of 30% indicates a 70% profit on COGS. | Gross Margin = (Revenue – COGS) / Revenue |
| Operating Margin | Profitability | Measures the percentage of revenue that remains after operating expenses are deducted. | Assess a company’s operational efficiency. | An operating margin of 15% means 15% of revenue remains as profit after operating expenses. | Operating Margin = Operating Income / Revenue |
| Net Profit Margin | Profitability | Measures the percentage of revenue that remains as profit after all expenses, including taxes and interest. | Assess overall profitability. | A net profit margin of 8% means 8% of revenue is profit after all expenses. | Net Profit Margin = Net Income / Revenue |
| Earnings Before Interest and Taxes (EBIT) Margin | Profitability | Measures the percentage of revenue that remains before interest and taxes are deducted. | Assess operating performance without considering financing decisions. | An EBIT margin of 20% indicates strong operational performance. | EBIT Margin = EBIT / Revenue |
| Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin | Profitability | Measures the percentage of revenue that remains before interest, taxes, depreciation, and amortization are deducted. | Assess operating performance with a focus on cash flow. | An EBITDA margin of 25% indicates efficient operation. | EBITDA Margin = EBITDA / Revenue |
| Free Cash Flow (FCF) Margin | Cash Flow | Measures the percentage of revenue that remains as free cash flow after all operating and capital expenses. | Evaluate a company’s ability to generate cash. | An FCF margin of 10% means 10% of revenue is available as free cash flow. | FCF Margin = FCF / Revenue |
| Price-to-Cash Flow (P/CF) Ratio | Valuation | Compares a company’s market price per share to its cash flow per share. | Assess valuation based on cash flow. | A P/CF ratio of 8 suggests investors pay $8 for every $1 of cash flow. | P/CF = Price per Share / Cash Flow per Share |
| Inventory Turnover Ratio | Efficiency | Measures how quickly a company sells and replaces its inventory. | Assess inventory management efficiency. | An inventory turnover ratio of 5 suggests inventory is sold and replaced 5 times a year. | Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory |
| Accounts Receivable Turnover Ratio | Efficiency | Measures how quickly a company collects payments from its customers. | Assess accounts receivable collection efficiency. | An AR turnover ratio of 6 suggests accounts receivable turn over 6 times a year. | Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable |
| Total Asset Turnover Ratio | Efficiency | Measures how efficiently a company uses its assets to generate revenue. | Evaluate asset utilization and efficiency. | A total asset turnover ratio of 0.8 suggests assets generate 80% of revenue annually. | Total Asset Turnover Ratio = Revenue / Total Assets |
| Operating Cash Flow to Sales Ratio | Cash Flow | Measures the percentage of sales revenue that is converted into operating cash flow. | Assess the conversion of sales into cash. | An operating cash flow to sales ratio of 15% means 15% of sales become cash flow. | Operating Cash Flow to Sales Ratio = Operating Cash Flow / Revenue |
| Operating Income Margin | Profitability | Measures the percentage of revenue that remains as operating income before interest and taxes. | Assess profitability from core operations. | An operating income margin of 12% suggests strong operational profitability. | Operating Income Margin = Operating Income / Revenue |
| Debt Ratio | Solvency | Compares a company’s total debt to its total assets. | Assess the proportion of assets financed by debt. | A debt ratio of 0.4 indicates 40% of assets are financed by debt. | Debt Ratio = Total Debt / Total Assets |
| Quick Assets Ratio | Liquidity | Compares a company’s quick assets (cash, marketable securities, and receivables) to its current liabilities. | Assess immediate liquidity without relying on inventory. | A quick assets ratio of 1.2 indicates strong liquidity. | Quick Assets Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities |
| Earnings Per Share (EPS) | Profitability | Represents the portion of a company’s profit allocated to each outstanding share of common stock. | Assess profitability on a per-share basis. | EPS of $2 means $2 of profit for each outstanding share. | EPS = Net Income / Number of Shares Outstanding |
| Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) | Profitability | Measures a company’s operating earnings before non-operating expenses. | Assess operating profitability. | EBITDA of $500,000 indicates strong operating earnings. | EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization |
| Earnings Before Interest and Taxes (EBIT) | Profitability | Represents a company’s operating profit before interest and taxes. | Assess core operational profitability. | EBIT of $1 million indicates strong operating profit. | EBIT = Earnings Before Interest and Taxes |
| Operating Cash Flow (OCF) | Cash Flow | Measures the cash generated or used by a company’s core operating activities. | Evaluate cash flow from operations. | OCF of $800,000 indicates positive cash flow from operations. | OCF = Operating Cash Flow |
| Free Cash Flow (FCF) | Cash Flow | Represents the cash generated or used by a company after capital expenditures. | Assess cash available for investors or debt reduction. | FCF of $400,000 indicates cash available for dividends or debt reduction. | FCF = Free Cash Flow |
| Return on Investment (ROI) | Profitability | Measures the return on an investment relative to its cost. | Evaluate the efficiency of an investment. | An ROI of 20% indicates a 20% return on an investment. | ROI = (Gain from Investment – Cost of Investment) / Cost of Investment |
| Return on Capital Employed (ROCE) | Profitability | Measures the return generated from the capital employed in a business. | Assess the efficiency of capital utilization. | ROCE of 15% indicates a 15% return on capital employed. | ROCE = Earnings Before Interest and Taxes (EBIT) / Capital Employed |
| Operating Cycle | Efficiency | Measures the time it takes for a company to convert inventory to cash. | Assess the efficiency of inventory and receivables management. | An operating cycle of 45 days suggests efficient working capital management. | Operating Cycle = Average Days of Inventory + Average Days of Receivables |
| Cash Conversion Cycle (CCC) | Efficiency | Measures the time it takes for a company to convert inventory and receivables into cash, considering payables. | Assess cash flow efficiency and liquidity management. | A CCC of 30 days indicates quick conversion of assets into cash. | CCC = Operating Cycle – Average Days of Payables |
| Net Working Capital | Liquidity | Represents the difference between a company’s current assets and current liabilities. | Assess liquidity and short-term solvency. | Net working capital of $500,000 indicates good short-term liquidity. | Net Working Capital = Current Assets – Current Liabilities |
| Quick Liquidity Ratio | Liquidity | Compares a company’s quick assets (cash, marketable securities, and receivables) to its current liabilities. | Assess immediate liquidity without relying on inventory. | A quick liquidity ratio of 1.5 indicates strong immediate liquidity. | Quick Liquidity Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities |
| Times Interest Earned (TIE) | Solvency | Measures a company’s ability to cover interest payments with its earnings before interest and taxes. | Assess solvency and ability to meet interest obligations. | A TIE ratio of 4 indicates earnings are four times the interest expenses. | TIE = Earnings Before Interest and Taxes (EBIT) / Interest Expense |
| Price-to-Operating Cash Flow (P/OCF) Ratio | Valuation | Compares a company’s market price per share to its operating cash flow per share. | Assess valuation based on operating cash flow. | A P/OCF ratio of 10 suggests investors pay $10 for every $1 of operating cash flow. | P/OCF = Price per Share / Operating Cash Flow per Share |
| Price-to-Free Cash Flow (P/FCF) Ratio | Valuation | Compares a company’s market price per share to its free cash flow per share. | Assess valuation based on free cash flow. | A P/FCF ratio of 12 suggests investors pay $12 for every $1 of free cash flow. | P/FCF = Price per Share / Free Cash Flow per Share |
| Return on Sales (ROS) | Profitability | Measures the percentage of revenue that remains as profit after all expenses. | Assess overall profitability. | An ROS of 12% means 12% of revenue is profit after all expenses. | ROS = Net Income / Total Revenue |
Read Next:
- The Three Most Important Financial Ratios for the Manager
- What Is a Financial Ratio? The Complete Beginner’s Guide to Financial Ratios
- What Is the Inventory Turnover Ratio? How Inventory Efficiency Can Fuel Business Growth
Resources for your business:
- What Is a Business Model? Successful Types of Business Models You Need to Know
- What Is a Business Model Canvas? Business Model Canvas Explained
What is the earning per share ratio formula?
(Net Income – Preferred Dividends) / Weighted Average Number of Common Shares
What are the key components of 15 Financial Ratios Formulas To Analyse Any Business?
The key components of 15 Financial Ratios Formulas To Analyse Any Business include Price-to-Earnings (P/E) Ratio, Price-to-Sales (P/S) Ratio, Price-to-Book (P/B) Ratio, Price/Earnings to Growth (PEG) Ratio, Dividend Yield. Price-to-Earnings (P/E) Ratio: Valuation
