Financial ratios are commonly used for financial statement analysis. These are mathematical indicators calculated to compare the financial position from year to year or company to company.

Direct comparison of financial statements is not as meaningful sometimes due to different size of relevant businesses for example. Financial ratios makes the financial statements analysis on a comparable level.

We categorised the financial ratios into the following groups and listed the most widely used formulas in each group to help us analyse the financial positions of companies:

I. Liquidity Analysis

II. Solvency Analysis

III. Coverage Analysis

IV. Profitability Analysis

V. Balance Sheet Analysis

VI. Shareholder Ratios

VII. Return Ratios

**I. Liquidity Analysis**

**1) Current ratio**

Measures the ability of a company to repay current liabilities with current assets

**Current ratio = Current Assets / Current Liabilities**

**2) Quick ratio (also called Acid Test Ratio)**

Measures the ability of a company to pay its debts by using its cash and near cash current assets

**Quick ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities**

**3) Cash ratio**

An extreme liquidity ratio since only cash and cash equivalents are compared with the current liabilities

**Cash ratio = Cash and Cash Equivalents / Current Liabilities**

**II. Solvency Ratio**

**4) Debt to Assets Ratio**

Measures the debt level of a company as a percentage of its total assets

**Debt to Assets Ratio = Total Debt / Total Assets**

**5) Debt to Equity Ratio**

Measures the degree to which the assets of the company are financed by the debts and the shareholders’ equity of a business

**Debt to Equity Ratio = Total Liabilities / Shareholders’ Equity**

**6) Debt to Capital Ratio**

Measures the proportion of interest-bearing debt as a percentage of interest-bearing debt and shareholders’ equity

**Debt to Capital Ratio = Total Debt / (Total Debt + Shareholders’ Equity)**

**III. Coverage Ratios**

**7) Interest Coverage Ratio**

Measures the ability of a business to pay off its debts

**Interest Coverage Ratio = EBIT / Interest Expenses**

**8) Fixed Charge Coverage Ratio**

Measures whether earnings before interest, taxes and lease payments are sufficient to cover the interest and lease payments

**Fixed Charge Coverage Ratio = (EBIT + Lease Payments excl. Interest) / (Lease Payment + Interest)**

**9) Equity Multiplier**

Measures assets in pound per pound of equity. The higher the ratio the lower the financial leverage and the lower the ratio the higher the financial leverage

**Equity Multiplier = Total Assets / Total Equity**

**IV. Profitability Analysis**

**10) Gross Margin**

Measures what proportion of revenue is converted into gross profit

**Gross Margin = Gross Profit / Total Revenue**

**11) Net Profit Margin**

Measures the percentage of a company’s net income to its total revenue

**Net Profit Margin = Net Income / Total Revenue**

**12) Operating Margin**

Measures the percentage of a company’s operating income to its total revenue

**Operating Margin = Operating Income / Total Revenue**

**13) EBITDA Margin**

Measures the percentage of a company’s earnings before interest, tax, depreciation and amortisation to its total revenue

**EBITDA Margin = EBITDA / Total Revenue**

**V. Balance Sheet Analysis**

**14) Days of Inventory**

Measures the number of days a company takes to sell its average balance of inventory

**Days of Inventory = (Average Inventory / COGS) x Number of Days**

**15) Inventory Turnover Ratio**

Measures the number of times per period a company sells its entire inventories

**Inventory Turnover Ratio = COGS / Average Inventory**

**16) Days Sales Outstanding (DSO or Days of Receivables)**

Measure the average number of days a company takes to collect its receivables

**DSO = (Accounts Receivables / Sales) x Number of Days**

Or

**DSO = Number of Days / Accounts Receivable Turnover**

**17) Receivables Turnover Ratio**

Measures how quickly a company collects its accounts receivable

**Receivables Turnover = Sales / Average Accounts Receivable**

**18) Days Payable Outstanding (DPO)**

Measures the average number of days a company pays its suppliers

**DPO = (Average Accounts Payable / COGS) x Number of Days**

Or

**DPO = Number of Days / Payables Turnover**

**19) Payables Turnover Ratio**

Measure the rate at which a company pays off its suppliers

**Payables Turnover = COGS / Average Accounts Payable**

**20) Fixed Assets Turnover Ratio**

Measures how efficiently a company is using its fixed assets in generating revenue

**Fixed Assets Turnover Ratio = Revenue / Average Fixed Assets**

**21) Working Capital Turnover Ratio**

Measures pound for pound how much a company is turning its working capital investment into revenue

**Working Capital Turnover Ratio = Revenue / Average Working Capital**

**22) Cash Conversion Cycle**

An efficiency ratio which measures how effectively a company is managing its working capital

**Cash Conversion Cycle = DSO + DIO – DPO**

DSO: days sales outstanding = (Average Accounts Receivable × 365) / Credit Sales

DIO: days inventory outstanding = (Average Inventories × 365) / Cost of Goods Sold

DPO: days payables outstanding = (Average Accounts Payable × 365) / Cost of Goods Sold

**VI. Shareholder Ratios**

**23) P/E Ratio**

Measures whether the share price of a company is fairly valued, undervalued or overvalued

**P/E Ratio = Current Share Price / Earnings Per Share**

**24) P/B Ratio**

Measures the proportion of the current market price of a share of a company’s common stock to the book value per share of the company

**P/B Ratio = Current Share Price / Book Value Per Share**

**25) Dividend Payout Ratio**

The percentage of a company’s earnings distributed to investors as dividends

**Dividend Payout Ratio = Dividends Per Share / Earnings Per Share = Dividends Paid / Net Income**

**26) Dividend Yield**

Measures the dividend per share paid by a company as a percentage of its current share price

**Dividend Yield = Dividends Per Share / Share price = Dividends Paid / Market Cap**

**27) Retention Ratio**

Opposite of Dividend Payout Ratio. It’s the earnings retained and reinvested by the company

**Retention Ratio = 1 – Payout Ratio = Retained Earnings / Total Earnings**

**VII. Return Ratios**

**28) ROA (Return on Assets)**

Measures the efficiency of a company in using its assets to generate net income

**ROA = Net Income / Average Total Assets**

**29) ROE**

Measure of the profitability of stockholders’ investments

**ROE = Net Income / Average Shareholders’ Equity**

**30) ROCE (Return on Capital Employed)**

Measures the profitability of a company’s operating profit as a percentage of its capital employed. Capital employed is the sum of stockholders’ equity and long-term finance

**ROCE = Net Income / Total Capital Employed**

We have also seen analysts using EBIT to calculate ROCE:

**ROCE = EBIT / Total Capital Employed**