Financial Statements formulas for common ratios

This page lists formulas for common financial ratios that are useful in Financial Statements. You might use these ratios to assess aspects of financial performance such as liquidity, leverage, growth, margins, profitability, rates of return, valuation and more. Note that the formulas are indicative, as every business will have its naming conventions and groupings.

Liquidity Ratios

Liquidity Ratios measure a company’s ability to repay both short-term and long-term debt obligations. Common liquidity ratios include the following:

Current Ratio

The Current Ratio, also known as the Working Capital Ratio, measures the capability of a business to meet its short-term obligations that are due within a year. The ratio considers the weight of total Current Assets versus total Current Liabilities. It indicates the financial health of a company and how it can maximize the liquidity of its current assets to settle debt and obligations to suppliers. The Current Ratio formula (below) can be used to easily measure a company’s liquidity.

On a Balance Sheet

[a]/[b] where [a] is Current Assets and [b] is Current Liabilities.

On a Profit & Loss Statement

[bal(Balance Sheet, Current Assets)]/[bal(Balance Sheet, Current Liabilities)]

Acid-Test Ratio/Quick Ratio

The Acid-Test Ratio, also known as the Quick Ratio, is a liquidity ratio that measures how sufficient a company’s short-term assets are to cover its current liabilities. In other words, the Acid-Test ratio is a measure of how well a company can satisfy its short-term (current) financial obligations.

On a Balance Sheet

([a]-[d])/[b] where [a] is Current Assets, [d] is Inventories and [b] is Current Liabilities.

On a Profit & Loss Statement

([bal(Balance Sheet, Current Assets)]-[bal(Balance Sheet, Inventories)])/[bal(Balance Sheet, Current Liabilities)]

Cash Ratio

The Cash Ratio, sometimes referred to as the Cash Asset Ratio, is a liquidity metric that indicates a company’s capacity to pay off short-term debt obligations with its cash and cash equivalents. Compared to other Liquidity Ratios the cash ratio is a stricter, more conservative measure because only cash and cash equivalents  – a company’s most liquid assets – are used in the calculation.

On a Balance Sheet

[e]/[b] where [e] is Cash and [b] is Current Liabilities.

On a Profit & Loss Statement

[bal(Balance Sheet, Cash)]/[bal(Balance Sheet, Current Liabilities)]

Working Capital

Like the Current Ratio, Working Capital measures the ability of a business to repay its short-term obligations (liabilities).

On a Balance Sheet

[a]-[b] where [a] is Current Assets and [b] is Current Liabilities.

On a profit and Loss Statement

[bal(Balance Sheet, Current Assets)]-[bal(Balance Sheet, Current Liabilities)]

Profitability Ratios

Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate profit relative to revenue, Balance Sheet assets, operating costs, and shareholders' equity during a specific period. They show how well a company uses its assets to produce profit and value for shareholders.

Gross Profit

The difference between Revenue and Cost of Goods Sold.

[a]-[b] where [a] is Revenue and [b] is Cost of Goods Sold.

Gross Margin

The Gross Margin, also known as the gross profit margin, is a profitability ratio that compares the gross profit of a company to its revenue. It shows how much profit a company makes after paying off its Cost of Goods Sold (COGS). The ratio indicates the percentage of each dollar of revenue that the company retains as gross profit (profit before operating expenses). For example, if the Gross Margin is calculated to be 20%, that means for every dollar of revenue generated, $0.20 is retained while $0.80 is attributed to the cost of goods sold. The remaining amount can be used to pay off general operating expenses, interest expenses, debts, rent, overhead, etc.

(([a]-[b])/[a])*100 where [a] is Revenue and [b] is Cost of Goods Sold.

Operating Profit Margin

Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit a company produces from its operations, before subtracting taxes and interest charges. It is calculated by dividing the operating profit by total revenue and expressing it as a percentage. The margin is also known as EBIT (Earnings Before Interest and Tax) Margin.

(([c]-[d])/[a])*100 where [c] is Gross Profit and [d] is Operating Expenses and [a] is Revenue.

Return on Assets

Return on Assets (ROA) is a type of return on investment measure metric that measures the profitability of a business in relation to its total assets. This ratio indicates how well a company is performing by comparing the profit it’s generating to the capital it has invested in assets.  The higher the return, the more efficient management is in using the company’s economic resources. 

([h]/[DaysInPeriod]*365)/[bal(Balance Sheet, Total Assets)]*100 where [h] is Profit. Note the [DaysInPeriod] and multiplication by 365 produces annualized profit.

Return on Equity

Return on Equity (ROE) is the measure of a company’s annual operating profit divided by the value of its total shareholders' equity, expressed as a percentage. The number represents the total return on equity capital and shows the company’s ability to turn equity investments into profits. To put it another way, it measures the profits made for each dollar of shareholders’ equity.

([h]/[DaysInPeriod]*365)/-[bal(Balance Sheet, Equity)]*100 where [h] is Profit.

Notes:

• The [DaysInPeriod] and multiplication by 365 produces annualized profit.

• You need to reverse the sign on Equity.

Efficiency Ratios

Efficiency Ratios, also known as Activity Financial Ratios, are used to measure how well a company is using its assets and resources. Common Efficiency Ratios include:

Asset Turnover

Asset Turnover is a ratio that measures the value of revenue generated by a business relative to its average total assets for a given fiscal or calendar year. It is an indicator of how efficient the company is at using both current and fixed assets to produce revenue.

[a]/[DaysInPeriod]*365)/[bal(Balance Sheet, Total Assets)] where [a] is Revenue. Note the [DaysInPeriod] and multiplication by 365 produces annualized Revenue.

Inventory Turnover

Inventory Turnover is the number of times a business sells and replaces its stock of goods during a given period. It considers the cost of goods sold, relative to its average inventory for a year or in any set period. A high inventory turnover generally means that goods are sold faster and a low turnover rate indicates weak sales and excess inventories, which may be challenging for a business.

[b]/[DaysInPeriod]*365)/[bal(Balance Sheet, Inventory)] where [b] is Cost of Goods Sold. Note the [DaysInPeriod] and multiplication by 365 produces an annualized Cost of Goods Sold.

Days Sales in Inventory (DSI)

Days Sales in Inventory (DSI), sometimes known as inventory days or days in inventory, is a measurement of the average number of days or time required for a business to convert its inventory into sales. The days sales in inventory value is calculated by dividing the inventory balance by the amount of Cost of Goods Sold. This number is then multiplied by the number of days in a year, quarter, or month.

365/([b]/[DaysInPeriod]*365)/[bal(Balance Sheet, Inventory)] where [b] is Cost of Goods Sold.

Days Sales Outstanding (DSO)

The Days Sales Outstanding (DSO) calculation, also called the average collection period or days’ sales in receivables, measures the number of days it takes a company to collect cash from its sales. This calculation shows the liquidity and efficiency of a company’s collections department.

[bal(Balance Sheet, Accounts Receivable)]/([a]/[DaysInPeriod]) where [a] is Revenue.

Days Payable Outstanding (DPO)

The days payable outstanding (DPO) is a financial ratio that calculates the average time it takes a company to pay its invoices from suppliers and vendors. For instance, a company that takes longer to pay its bills has access to its cash for a longer period and can do more things with it during that period.

[bal(Balance Sheet, Accounts Payable)]/([b]/[DaysInPeriod]) where [b] is Cost of Goods Sold.

Cash Conversion Cycle (CCC)

The cash conversion cycle (CCC) is a cash flow calculation that attempts to measure the time it takes a company to convert its investment in inventory and other resource inputs into cash. In other words, the cash conversion cycle calculation measures how long cash is tied up in inventory before the inventory is sold and cash is collected from customers.

DSI + DSO - DPO

Leverage Ratios

Leverage Ratios measure the amount of capital in a business that comes from debt. In other words, Leverage Financial Ratios are used to evaluate the risks associated with a company’s debt levels. Common leverage ratios include the following:

Debt Ratio

The Debt Ratio is a Leverage Ratio that indicates the percentage of assets that are being financed with debt. The higher the ratio, the greater the degree of leverage and financial risk. The Debt Ratio is commonly used by creditors to determine the amount of debt in a company, the ability to repay its debt, and whether additional loans will be extended to the company. On the other hand, investors use the ratio to make sure the company is solvent, can meet current and future obligations, and can generate a return on their investment.

On a Balance Sheet

([e]+[f])/[a] where [e] is Short Term Loans, [f] is Long Term Loans and [a] is Total Assets.

On a Profit and Loss Statement

([bal(Balance Sheet, Loans due this year)]+[bal(Balance Sheet, Loans Long Term)])/[bal(Balance Sheet, Total Assets)]

Debt to Equity Ratio

The Debt to Equity ratio (also called the “debt-equity ratio”, “risk ratio”, or “gearing”), is a Leverage Ratio that calculates the weight of total debt and financial liabilities against total shareholders' equity. This ratio highlights how a company’s capital structure is tilted either toward debt or equity financing.

Debt to Equity Ratio = (short term debt + long term debt) / Shareholders’ Equity

On a Balance Sheet

([e]+[f])/[g] where [e] is Short Term Loans, [f] is Long Term Loans and [g] is Total Shareholders' Equity.

On a Profit and Loss Statement

([bal(Balance Sheet, Loans due this year)]+[bal(Balance Sheet, Loans Long Term)])/[bal(Balance Sheet, Total Equity)]

Interest Cover Ratio

The Interest Coverage Ratio is a financial ratio that is used to determine how well a company can pay the interest on its outstanding debts. The ratio is commonly used by lenders, creditors, and investors to determine the riskiness of lending capital to a company.

[p]/[h] where [p] is Earnings Before Interest & Tax and [h] is Interest Expense.