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Financial Ratios Cheat Sheet
Get your Financial Ratios Cheat Sheet to easily evaluate a company’s financial health. Download the Excel file for quick calculations.
Financial ratios offer several advantages for analyzing and understanding the financial health and performance of a business. They help business leaders assess the current situation, predict the future, and set business goals and directions.
What is a Financial Ratio?
A financial ratio is a numerical value that is derived by comparing two or more items from a company’s financial statements, such as the income statement, balance sheet, or cash flow statement. Financial ratios help investors, analysts, and managers evaluate the performance, efficiency, profitability, and financial health of a company. They are used to gain insights into areas like liquidity, solvency, profitability, and operational efficiency.
Categories of Financial Ratios:
- Liquidity Ratios
- Solvency Ratios
- Profitability Ratios
- Efficiency Ratios
- Market Ratios
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All these ratios are used to assess a company’s financial health. We have several courses that cover financial ratios analysis and some are highly recommended for further learning.
What are uses of Financial Ratios?
Financial ratios are used for a variety of purposes by different stakeholders such as investors, analysts, company management, and lenders. Here are the key uses of financial ratios:
- Assessing Profitability
- Measuring Operational Efficiency
- Analyzing Solvency & Leverage
- Benchmarkeing Performance
- Company Valuation
- Monitoring Financial Health
- Credit Analysis
- Forecasting & Trend Analysis
- Strategic Decision Making
Guide to Financial Ratios:
We have created a Financial Ratios cheat sheet with a downloadable Excel file for you to conveniently track and calculate all these ratios by simply keying in respective values.
1. Liquidity Ratios
These ratios measure a company’s ability to pay off its short-term liabilities with its short-term assets.
- Current Ratio
- Formula: Current Assets / Current Liabilities
- Purpose: Assesses the ability to pay short-term obligations.
- Example: If Current Assets = $500,000 and Current Liabilities = $250,000, then Current Ratio = 2.0
- Quick Ratio (Acid-Test Ratio)
- Formula: (Current Assets – Inventory) / Current Liabilities
- Purpose: Measures short-term liquidity, excluding inventory.
- Example: If Current Assets = $500,000, Inventory = $100,000, and Current Liabilities = $250,000, then Quick Ratio = 1.6
- Cash Ratio
- Formula: Cash and Cash Equivalents / Current Liabilities
- Purpose: Evaluate the company’s ability to pay off short-term debt with cash.
- Example: If Cash = $200,000 and Current Liabilities = $250,000, then Cash Ratio = 0.8
2. Solvency Ratios
These ratios measure a company’s ability to meet its long-term obligations.
- Debt to Equity Ratio
- Formula: Total Debt / Total Equity
- Purpose: Indicates the proportion of debt used to finance the assets relative to equity.
- Example: If Total Debt = $600,000 and Total Equity = $400,000, then Debt to Equity Ratio = 1.5
- Debt Ratio
- Formula: Total Debt / Total Assets
- Purpose: Shows the percentage of a company’s assets that are financed by debt.
- Example: If Total Debt = $600,000 and Total Assets = $1,000,000, then Debt Ratio = 0.6
- Interest Coverage Ratio
- Formula: EBIT / Interest Expense
- Purpose: Measures the ability to pay interest on outstanding debt.
- Example: If EBIT = $150,000 and Interest Expense = $50,000, then Interest Coverage Ratio = 3.0
3. Profitability Ratios
These ratios measure a company’s ability to generate earnings relative to revenue, assets, equity, and other financial metrics.
- Gross Profit Margin
- Formula: (Revenue – Cost of Goods Sold) / Revenue
- Purpose: Shows the percentage of revenue that exceeds the cost of goods sold.
- Example: If Revenue = $1,000,000 and COGS = $600,000, then Gross Profit Margin = 40%
- Operating Profit Margin
- Formula: Operating Income / Revenue
- Purpose: Measures profitability from core operations.
- Example: If Operating Income = $200,000 and Revenue = $1,000,000, then Operating Profit Margin = 20%
- Net Profit Margin
- Formula: Net Income / Revenue
- Purpose: Indicates how much profit a company makes for every dollar of revenue.
- Example: If Net Income = $150,000 and Revenue = $1,000,000, then Net Profit Margin = 15%
- Return on Assets (ROA)
- Formula: Net Income / Total Assets
- Purpose: Measures how efficiently assets are used to generate profit.
- Example: If Net Income = $150,000 and Total Assets = $1,000,000, then ROA = 15%
- Return on Equity (ROE)
- Formula: Net Income / Shareholders’ Equity
- Purpose: Indicates how effectively equity is used to generate profit.
- Example: If Net Income = $150,000 and Shareholders’ Equity = $600,000, then ROE = 25%
4. Efficiency Ratios
These ratios measure how well a company uses its assets and liabilities internally.
- Inventory Turnover
- Formula: Cost of Goods Sold / Average Inventory
- Purpose: Shows how many times inventory is sold and replaced over a period.
- Example: If COGS = $600,000 and Average Inventory = $100,000, then Inventory Turnover = 6.0
- Accounts Receivable Turnover
- Formula: Net Credit Sales / Average Accounts Receivable
- Purpose: Measures how efficiently a company collects revenue from its customers.
- Example: If Net Credit Sales = $900,000 and Average Accounts Receivable = $150,000, then AR Turnover = 6.0
- Asset Turnover
- Formula: Revenue / Average Total Assets
- Purpose: Indicates how efficiently a company uses its assets to generate sales.
- Example: If Revenue = $1,000,000 and Average Total Assets = $1,200,000, then Asset Turnover = 0.83
5. Market Ratios
These ratios relate a company’s financial metrics to its stock price, providing insights into the value of the company’s stock.
- Earnings Per Share (EPS)
- Formula: Net Income / Average Outstanding Shares
- Purpose: Indicates how much profit is allocated to each share of stock.
- Example: If Net Income = $150,000 and Average Outstanding Shares = 50,000, then EPS = $3.00
- Price to Earnings Ratio (P/E)
- Formula: Market Price per Share / Earnings Per Share (EPS)
- Purpose: Measures the current share price relative to its per-share earnings.
- Example: If Market Price per Share = $30 and EPS = $3, then P/E Ratio = 10
- Dividend Yield
- Formula: Annual Dividends per Share / Market Price per Share
- Purpose: Shows how much a company pays out in dividends each year relative to its share price.
- Example: If Annual Dividends per Share = $1.50 and Market Price per Share = $30, then Dividend Yield = 5%
This cheat sheet covers essential financial ratios across various categories, offering a snapshot of a company’s financial health, efficiency, and market position. You can download the Excel File by clicking the link below:
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