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:

1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
4. Efficiency Ratios
5. Market Ratios

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:

https://app.box.com/s/18jond4eglwksobdg2mliumxj4071o99