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

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