Formulas For Common Ratios

Growth Rates
Xt −Xt−1
One-year Growth Rate Xt−1

  n1
Xt
Compound Average Growth Rate (CAGR)1 Xt−n −1

Profitability Ratios

Gross Profit
Gross Margin Sales
EBIT
Operating Margin Sales
Net Income
Net Margin Sales
EBIT(1-Tax Rate)
Return on Assets (ROA)2 Average Total Assets

Net Income
Return on Beginning Equity (ROBE)3 Beginning Equity

EBIT(1-Tax Rate)
Return on Invested Capital (ROIC)4 Interest-bearing Debt + Equity

EBIT
Pretax Return on Invested Capital Interest-bearing Debt + Equity

1
n denotes the number of periods between observations Xt and Xt−n .
2
Ratios that compare balance sheet and income accounts are often computed using the average of the balance sheet
item. The average is computed by averaging beginning and year-end account balances.
3
Some analysts use year-end or average equity when computing ROE.
4
Interest-bearing debt is commonly defined as the sum of long-term debt, current portion long-term debt, and short-
term debt. Analysts may use year-end or average invested capital.

HBS Finance Tutorial 1 Ratio Formulas

 Efficiency Ratios

Sales
Asset Turnover Average Total Assets

Sales
Net Working Capital Turnover Average Net Working Capital

Sales
Fixed Assets Turnover Net PP&E
Average Inventory
Days in Inventory (Days) COGS/365

COGS
Inventory Turnover Average Inventory

Average Receivables
Collection Period (Days) Sales/365

Sales
Receivables Turnover Average Receivables

Cash + Securities
Days’ Sales in Cash (Days) Sales/365

Accounts Payable
Payables Period (Days)5 Credit Purchases/365

Liquidity Ratios

Current Assets
Current Ratio Current Liabilities
Cash + Marketable Securities + Receivables
Quick Ratio6 Current Liabilities
Cash + Marketable Securities
Cash Ratio Current Liabilities
Cash + Marketable Securities + Receivables
Interval Measure7 Operating Costs/365

5
COGS is often used when credit purchase information is unavailable.
6
This ratio sometimes uses “Current Assets - Inventory” in the numerator.
7
Operating costs are defined as “COGS + SG&A - Depreciation.”

HBS Finance Tutorial 2 Ratio Formulas

 Leverage Ratios

Interest-bearing Debt + Leases

Debt Ratio Interest-bearing Debt + Leases + Equity

Interest-bearing Debt
Debt to Equity Ratio8 Equity

Equity
Equity to Asset Ratio Total Assets
EBIT
Times-interest Earned Interest
EBITDA
Times-interest Earned (Cash Flow)9 Interest
EBIT
Times-burden Covered10
Interest+ Principal Payments
(1 - Tax Rate)

Risk Ratios
SG&A + Depreciation - Sales Commissions
Fixed to Variable Costs11 COGS - Depreciation

Sales
Sales to Fixed Costs SG&A + Depreciation - Sales Commissions

Revenue - Variable Costs

Contribution Margin Sales

8
Some analysts use “Long-term Debt + Leases” as a measure of debt when computing debt to equity ratios. Equity
may be measured on a book-value basis or a market-value basis
9
EBITDA equals earnings before interest, taxes, depreciation, and amortization.
10
Principal payments are defined as “Short-term Debt + Current Portion Long-term Debt.”
11
This is an approximation; more refined definitions may be used when detailed information on costs is available.

HBS Finance Tutorial 3 Ratio Formulas