Ratio formulas by group
Liquidity ratios compare short-term resources with short-term obligations. Current ratio = current assets ÷ current liabilities. Quick ratio = (cash + marketable securities + accounts receivable) ÷ current liabilities, which leaves out inventory and prepaid items. Cash ratio = (cash + marketable securities) ÷ current liabilities.
Debt ratios show how the business is financed and how easily it carries its debt. Debt ratio = total liabilities ÷ total assets; debt-to-equity = total liabilities ÷ shareholders' equity; times interest earned = EBIT ÷ interest expense; debt service coverage = net operating income ÷ annual principal and interest.
Profitability and efficiency ratios divide income or sales by the resources used to earn them. Market ratios work per share: EPS = (net income − preferred dividends) ÷ weighted-average common shares, and P/E = share price ÷ EPS.
| Ratio | Formula |
|---|---|
| Gross margin | (Revenue − COGS) ÷ revenue |
| Operating margin | Operating income ÷ revenue |
| Net margin | Net income ÷ revenue |
| ROA | Net income ÷ total assets |
| ROE | Net income ÷ shareholders' equity |
| Asset turnover | Revenue ÷ total assets |
| Inventory turnover | COGS ÷ inventory; days = 365 ÷ turnover |
| Receivables turnover | Revenue ÷ receivables; DSO = 365 ÷ turnover |
| Dividend yield | Dividends per share ÷ share price |
| Payout ratio | Dividends per share ÷ EPS |
| Book value per share | (Equity − preferred equity) ÷ shares |
Worked example
A company has 250,000 of current assets and 125,000 of current liabilities, including 40,000 cash, 10,000 of marketable securities and 50,000 of receivables. Current ratio = 250,000 ÷ 125,000 = 2.00. Quick ratio = (40,000 + 10,000 + 50,000) ÷ 125,000 = 0.80. Cash ratio = 50,000 ÷ 125,000 = 0.40.
The same company earns 90,000 net income on 1,000,000 of revenue, with 1,000,000 of assets and 600,000 of equity: net margin 9%, ROA 9% and ROE 15%. With 100,000 shares, EPS is 0.90; at a share price of 18 the P/E is 20.
Averages, period-end balances and other conventions
Many textbooks use the average of opening and closing balances for ratios that mix a whole year of income with a balance sheet figure (ROA, ROE, turnover ratios). Others use period-end balances. Neither is wrong, but results differ, so compare companies or years only when the ratios were calculated the same way. To use averages, enter (opening + closing) ÷ 2 in the balance fields.
Definitions also vary in the details: some analysts count only interest-bearing debt in debt-to-equity, use net credit sales for receivables turnover, or use a 360-day year. The notes under each result say which version is used here. What counts as a healthy ratio depends heavily on the industry.