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Irrespective of whether you’re a small business owner or the CEO of a sought-after multinational corporation, it is vital for you to track your business finances in a systematic way. This is where meaningful information with respect to your finances plays a crucial role. As long as you can track the financial performance of your business effectively, you have a great chance of having things in control. Speaking of metrics to gauge financial performance, the list can be inexhaustible.
However, an effective overview of business finances can be summed up with the assistance of a few financial ratios that turn out to be credible measures of financial performance. This meticulous blog highlights the most significant financial ratios that gauge different aspects of financial information and performance. Here, you will find a comprehensive guide on the salient financial ratios that are significant for companies to keep a consistent track of their financial position. Besides, what sets this blog apart from others is that we have embedded functional and advanced calculators for real-time calculations of these ratios.
Delving into the definition of financial ratios
Financial statements of companies offer a precise and data-driven overview of their financial performance in a given fiscal year. Further, from these financial statements, the numeric values can be processed to calculate some ratios that offer a more substantial picture of the financial competitiveness that a company holds. These ratios derived from a company’s finances inclusive of equity, cash flow, net income, earnings per share, liquidity, the value of assets, and so on are called financial ratios. From the financial statements of a company, the financial ratios extract more precise and meaningful information.
Furthermore, primarily, there are five categories of financial ratios that hold the greatest importance in terms of tracking financial performance. These ratios include liquidity ratios, leverage ratios, efficiency ratios, profitability ratios, and market value ratios. Further, there are different ratios under each category and the functional calculators for each of these ratios are given in the subsequent section. Besides, in the section subsequent to the calculators, a detailed explanation of all financial ratios is provided for a more lucid understanding.
List of financial ratios
1. Liquidity Financial Ratios
Liquidity ratios measure a company's ability to pay off its obligations both in the short term and the long term. To explain, liquidity ratios evaluate a company’s ability to pay off its current debt without any external capital being raised.
Primarily there are four types of liquidity ratios for evaluating a debtor’s ability to repay obligations. The same are listed below.
- Current ratio
- Acid-test ratio
- Cash ratio
- Operating cash flow ratio
a. Current Ratio
Current ratio is a quantitative measure of an organization’s capability of repaying its short-term debt obligations with its current assets. The formula is given below.
Formula to Calculate Current Ratio
|Current Ratio =
|Company’s Current Assets
|Current Liabilities of the Company
Calculate Current Ratio
b. Acid-Test Ratio
A company’s quick assets include cash and other forms of accounts receivable which can be converted into cash readily with minimum discounting. The acid-test ratio in quantifiable terms measures a business organization’s ability to settle short-term debt obligations with the quick assets of the company. The formula for yielding the acid-test ratio is given below.
Formula to Calculate Acid-Test Ratio
|Acid-test Ratio =
|Company’s Current Assets - Inventory
Calculate Acid-Test Ratio
c. Cash Ratio
In quantitative terms, the cash ratio assesses a business organization’s financial ability to repay its short-term debt liabilities with either cash or cash equivalents. The formula is mentioned below
Formula to Calculate Cash Ratio
|Cash Ratio =
|Company’s Cash and Cash Equivalents
Calculate Cash Ratio
Cash and Cash equivalents
d. Operating cash flow ratio
With respect to a given period, the operating cash flow ratio measures the number of times a business corporation can repay its current liabilities with the generated cash. The formula is provided below. It can also be understood as a direct measure of a company’s cash flow.
Formula to Calculate Operating Cash Flow Ratio
|Operating Cash Flow Ratio =
|Company’s Operating Cash Flow
Calculate Operating Cash Flow Ratio
Operating cash flow
Operating Cash Flow Ratio
2. Leverage Financial Ratios
Leverage ratios offer a direct measure of a business organization’s debt levels. To elucidate, leverage ratios assess the capital of a company that comes from debts. The following are the four types of leverage financial ratios.
- Debt ratio
- Debt to equity ratio
- Interest coverage ratio
- Debt service coverage ratio
a. Debt Ratio
The debt ratio is a measure of the relative amount of an organization’s assets raised from debts. The formula is provided below
Formula to Calculate Debt Ratio
|Debt Ratio =
|Company’s Total Liabilities
|Company’s Total Assets
Calculate Debt Ratio
b. Debt to equity ratio
The debt to equity ratio provides a measure of the total debt and financial obligations of a company relative to shareholders’ equity. The formula is mentioned below.
Formula to Calculate Debt to Equity Ratio
|Debt to Equity Ratio =
|Company’s Total Liabilities
Calculate Debt to Equity Ratio
Debt Equity Ratio
c. Interest Coverage Ratio
The interest coverage ratio measures the ease with which a company can pay off its interest payments. The formula for the same is included below
Formula to Calculate Interest Coverage Ratio
|Interest Coverage Ratio =
|Company’s Operating Income
Calculate Interest Coverage Ratio
Interest Coverage Ratio
d. Debt service coverage ratio
The debt service coverage ratio offers quantitative insights into the convenience with which an organization can repay its financial obligations. To calculate the debt service coverage ratio, the following formula is applied.
Formula to Calculate Debt Service Coverage Ratio
|Debt Service Coverage Ratio =
|Total Debt Service
Calculate Debt Service Coverage Ratio
Total debt service
Debt Service Coverage Ratio
3. Efficiency Financial Ratios
Efficiency ratios provide meaningful information on a company’s efficiency with respect to the utilization of its assets and resources. To explain, companies can apply the VRIO Analysis to evaluate their key resources and capabilities. Besides, efficiency ratios are also known as activity financial ratios.
Probing further, primarily, there are four efficiency financial ratios that companies measure for gauging their efficiency. These include the following.
- Asset turnover ratio
- Inventory turnover ratio
- Receivables turnover ratio
- Day sales in inventory ratio
a. Asset Turnover Ratio
The asset turnover ratio measures the efficiency of a company in terms of generating sales from its assets. Further, the ratio can also be used as an effective measure for measuring a company’s revenue generation. The formula is provided below.
Formula to Calculate Asset Turnover Ratio
|Asset Turnover Ratio =
|Company’s Net Sales
|Average Total Assets
Calculate Asset Turnover Ratio
Average total assets
Asset Turnover Ratio
b. Inventory Turnover Ratio
The inventory Turnover Ratio provides information about the number of times a company’s inventory is either sold or replaced in the course of a given time period. The formula is given below.
Formula to Calculate Inventory Turnover Ratio
|Inventory Turnover Ratio =
|Cost of goods sold (COGS)
Calculate Inventory Turnover Ratio
Cost of goods sold
Inventory Turnover Ratio
c. Receivables Turnover Ratio
Receivables turnover ratio is a measure of the frequency with which a company can convert its receivables into cash in a specific time period. The formula to calculate the receivables turnover ratio is provided below.
Formula to Calculate Receivables Turnover Ratio
|Receivables Turnover Ratio =
|Company’s Net Credit Sales
|Average Accounts Receivable
Calculate Receivables Turnover Ratio
Net credit sales
Average accounts receivable
Accounts Receivable Turnover Ratio
d. Day sales in inventory ratio
Day sales in inventory ratio is calculated to find out the average number of days for which a company stocks its inventory before selling the same to its customers. Besides, this ratio is calculated using the inventory turnover ratio. The formula is given below
Formula to Calculate Day Sales in Inventory Ratio
|Day Sales in Inventory Ratio =
|Inventory Turnover Ratio
Calculate Day Sales in Inventory Ratio
Inventory turnover ratio
Days Sales in Inventory Ratio
4. Profitability ratios
Profitability financial ratios provide meaningful information about the profitability scenarios of a company. To explain, these ratios measure a company’s efficiency in generating income relative to equity, operating costs, revenue generation, and balance sheet assets. The various subcategories of profitability ratios are listed below.
- Gross margin ratio
- Operating margin ratio
- Return on assets ratio
- Return on equity ratio
a. Gross margin ratio
Gross profit ratio is a comparison between the gross profits of a company and its net sales. The ratio assesses the profitability of a company after the payment of the cost of goods sold. The formula is given below
Formula to Calculate Gross Margin Ratio
|Gross Margin Ratio =
|Company’s Gross Profit
Calculate Gross Margin Ratio
Gross Margin Ratio
b. Operating Margin Ratio
Operating margin ratio is a quantitative measure of the operating efficiency of an organization. The ratio compares the operating income of an organization to its net sales. The formula is included below.
Formula to Calculate Operating Margin Ratio
|Operating Margin Ratio =
|Company’s Operating Income
Calculate Operating Margin Ratio
Operating Margin Ratio
c. Return on Assets Ratio
Return on assets ratio determines an organization’s ability to generate profits through its assets. Return on assets is a vital metric for measuring the productivity of a business in terms of the value it is able to generate through investments in assets. The formula is given below.
Formula to Calculate Return on Assets Ratio
|Return on Assets Ratio =
|Company’s Net Income
Calculate Return on Assets Ratio
Return On Assets Ratio
d. Return on Equity Ratio
Return on equity ratio determines an organization’s ability to generate profits through equity. It is one of the most imperative measures of a company’s profitability and hence, financial performance. Further, ROE ratios can also be used to determine the future growth rate of a business The formula to calculate the return on equity ratio is given below.
Formula to Calculate Return on Equity Ratio
|Return on Equity Ratio =
|Company’s Net Income
Calculate Return on Equity Ratio
Return on Equity Ratio
5. Market Value Financial Ratios
The market value ratios are calculated to determine the share price value of a company‘s stock. To elaborate, market value ratios ascertain the current share price of a company with public holding. These ratios are essential from the investor’s perspective. The key market value ratios are listed below.
- Book value per share ratio
- Dividend yield ratio
- Price-earnings ratio
- Earnings per share ratio
a. Book Value Per Share Ratio
Book value per share ratio determines the value per share of a company relative to the equity that is available to stakeholders. It can be calculated using the following formula.
Formula to Calculate Book Value Per Share Ratio
|Book Value Per Share Ratio =
|Equity Available with Shareholders - Preferred Equity
|Total Common Shares Outstanding
Calculate Book Value Per Share Ratio
Total common shares outstanding
Book Value Per Share Ratio
b. Dividend Yield Ratio
Relative to the market value per share, the dividend yield ratio is calculated to measure the dividends accredited to shareholders of the company. The formula is provided below.
Formula to Calculate Dividend Yield Ratio
|Dividend Yield Ratio =
|Dividend Per Share
Formula to Calculate Dividend Yield Ratio
Dividend per share
Dividend Yield Ratio
c. Price Earnings Ratio
The price-earnings ratio ascertains the share price of a company relative to the earnings per share. With respect to determining the stock valuation of a company, this ratio is one of the most common and vital metrics applied by investors and analysts. The formula for determining the price-earnings ratio is included below.
Formula to Calculate Price Earnings Ratio
|Price Earnings Ratio =
|Company’s share price
|Earnings per share
Calculate Price Earnings Ratio
Earnings per share
Price Earnings Ratio
d. Earnings Per Share Ratio
The earnings per share ratio measures the net income that is earned by a company per share (outstanding shares). This ratio is vital for investors to gauge the financial performance and profitability scenarios of a company before investing in it. The formula is given below.
Formula to Calculate Earnings Per Share Ratio
|Earnings Per Share Ratio =
|Company’s net earnings
|Total shares outstanding
Calculate Earnings Per Share Ratio
Total shares outstanding
Earnings Per Share Ratio