FINANCIAL RATIOS

Ratio How it is Calculated What the Ratio Measures Ratio Category

1. Liquidity Ratios
Current ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 The extent to which a firm can meet its short-term Liquidity ratios
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 debts. measure the firm’s
ability to pay short
Quick ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑆𝑡𝑜𝑐𝑘 The extent to which a firm can meet its short-term term debts using
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 debts without relying on the sale of its inventories. current assets that can
be changed into cash.
2. Leverage Ratios
Debt to asset ratio 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 The proportion of total funds provided by creditors. Leverage ratios
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 measure the extent to
which the firm has
Debt to equity ratio 𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 The proportion of total funds that are provide by been financed by debt.
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 creditors as compared to business owners.

Long-term debt to 𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 The balance between debt and equity in the firm’s
equity ratio 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 long-term capital structure.

Times interest 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 & 𝑡𝑎𝑥 The extent to which earnings can decline without
earned ratio 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 the firm becoming unable to meet its annual
interest costs.
3. Activity Ratios
Inventory turnover 𝑆𝑎𝑙𝑒𝑠 Measures the rate at which inventory is used over a Activity ratios measure
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 period. A low figure may indicate that a firm holds how effectively the
excessive stocks and selling is selling slowly. firm is using its various
Fixed asset 𝑆𝑎𝑙𝑒𝑠 Indicates how well or efficiently a business uses its resources.
turnover 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 fixed assets to generate sales. Shows whether a
firm is generating a suitable amount of sales from
its plant and equipment.
Total asset
turnover
Accounts
receivable turnover
Average collection
period
4. Profitability Ratios
Gross profit margin
Operating profit 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 & 𝑡𝑎𝑥 Multiply by 100 to show as a percentage.
margin
Net profit margin
Return on total
assets
Return on Equity
Earnings per share
𝑁𝑜. 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Indicates the profitability per share.
𝑆𝑎𝑙𝑒𝑠 Indicates how well or efficiently a business uses all
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 its assets to generate sales. Shows whether a firm is
generating a suitable number of sales compared to
the amount of assets that it has.
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 The number of times per year that a business
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 collects its average accounts receivable. A measure
of how effective the firm is at collecting payment
from customers.
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 The average length of time a firm takes to collect
𝑇𝑜𝑡𝑎𝑙 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠/365 payment from customers (in days)
𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 Multiply by 100 to show as a percentage. Profitability ratios
𝑆𝑎𝑙𝑒𝑠 The total margin available to cover operating measure the top
expenses and provide a profit. management’s overall
effectiveness as shown
𝑆𝑎𝑙𝑒𝑠 Profit generated before paying loan interest charges by the returns
and taxes. generated on sales and
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Multiply by 100 to show as a percentage. investment.
𝑆𝑎𝑙𝑒𝑠 Profit generated after all expenses and taxes have
been paid.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Multiply by 100 to show as a percentage.
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 After tax profits generated by total assets in the
firm. Also show the profit generated from the total
investment made by the firm (Return on
Investment).
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Multiply by 100 to show as a percentage.
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 After tax profits generated by owners’ equity in the
firm. Shows the profit generated by owners’ funds.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Earnings available to the owners of common shares.
Price earnings ratio 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 Indicated the attractiveness of the firm as an
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 investment on the stock market.

5. Growth Ratios
Sales 𝑌𝑟2 𝑆𝑎𝑙𝑒𝑠 – 𝑌𝑟1 𝑆𝑎𝑙𝑒𝑠 Percentage change from previous year shows rate
𝑌𝑟1 𝑆𝑎𝑙𝑒𝑠 of growth or decline in sales.

Net income 𝑌𝑟2 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 – 𝑌𝑟1 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Percentage change from previous year shows rate
𝑌𝑟1 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 of growth or decline in net income (profitability).

Earnings per share 𝑌𝑟2 𝐸𝑃𝑆 – 𝑌𝑟1 𝐸𝑃𝑆 Percentage change from previous year shows rate
𝑌𝑟1 𝐸𝑃𝑆 of growth or decline in EPS.

Dividends per share 𝑌𝑟2 𝐷𝑃𝑆 – 𝑌𝑟1 𝐷𝑃𝑆 Percentage change from previous year shows rate
𝑌𝑟1 𝐷𝑃𝑆 of growth or decline in dividends per share paid.