15 Financial Ratios Formulas To Analyse Any Business

These are the most important financial ratios formulas you can use to analyze any business:

Table of Contents

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