Reference table
Financial ratios cheat sheet
27 ratios on one page, grouped by the question each answers: liquidity, activity, leverage, profitability and investment. Each row has the formula, what it measures and a link to a calculator where we have one. Print it, or copy it into Excel.
The ratios
Liquidity
Can the business pay what it owes in the next year?
| Ratio | Formula | What it measures |
|---|---|---|
| Current ratio | Current assets ÷ Current liabilities | Current assets available for each dollar due within a year |
| Quick (acid-test) ratio | (Cash + Marketable securities + Receivables) ÷ Current liabilities | The same test without inventory and prepaid expenses |
| Cash ratio | (Cash + Marketable securities) ÷ Current liabilities | Current liabilities covered by cash on hand alone |
| Working capital | Current assets − Current liabilities | The cushion of short-term assets over short-term obligations, in dollars |
Activity and efficiency
How quickly does the business turn assets into cash?
| Ratio | Formula | What it measures |
|---|---|---|
| Inventory turnover | Cost of goods sold ÷ Average inventory | How many times inventory is sold and replaced in the period |
| Days in inventory (DIO) | Days in the period ÷ Inventory turnover | Average days stock is held before it's sold |
| Receivables turnover | Credit sales ÷ Average accounts receivable | How many times receivables are collected in the period |
| Days sales outstanding (DSO) | Average accounts receivable ÷ Credit sales × Days in the period | Average days to collect after a credit sale |
| Payables turnover | Purchases (or cost of goods sold) ÷ Average accounts payable | How many times suppliers are paid in the period |
| Days payables outstanding (DPO) | Average accounts payable ÷ Cost of goods sold × Days in the period | Average days taken to pay suppliers |
| Cash conversion cycle | DIO + DSO − DPO | Days between paying for inventory and collecting from customers |
| Asset turnover | Revenue ÷ Average total assets | Revenue generated per dollar of assets |
Leverage and coverage
How much of the business is financed with debt, and can it carry it?
| Ratio | Formula | What it measures |
|---|---|---|
| Debt-to-equity | Total debt ÷ Total shareholders' equity | Borrowed money per dollar of owners' money |
| Debt ratio | Total liabilities ÷ Total assets | The share of assets financed by liabilities |
| Interest coverage | EBIT ÷ Interest expense | How many times operating earnings cover interest |
| Debt to EBITDA | Total debt ÷ EBITDA | Years of EBITDA it would take to repay the debt |
Profitability
How much of each dollar of revenue, or of capital, becomes profit?
| Ratio | Formula | What it measures |
|---|---|---|
| Gross margin | (Revenue − Cost of goods sold) ÷ Revenue | Profit left after the direct cost of what was sold |
| Markup | (Price − Cost) ÷ Cost | Profit as a share of cost, the pricing view of margin |
| Contribution margin ratio | (Price − Variable cost) ÷ Price | The share of each sale left to cover fixed costs |
| Operating margin | Operating income ÷ Revenue | Profit from operations before interest and taxes |
| EBITDA margin | EBITDA ÷ Revenue | Operating profit before depreciation and amortization |
| Net profit margin | Net income ÷ Revenue | The bottom line as a share of revenue |
| Return on assets (ROA) | Net income ÷ Average total assets | Profit earned on the assets the business uses |
| Return on equity (ROE) | Net income ÷ Average shareholders' equity | Profit earned on the owners' investment |
Investment decisions
Is a project worth what it costs?
| Ratio | Formula | What it measures |
|---|---|---|
| Payback period | Years until cumulative cash flow covers the investment | How long the money is at risk |
| Internal rate of return (IRR) | The discount rate at which NPV = 0 | The return the project earns, as a rate |
| Profitability index | Present value of future cash flows ÷ Initial investment | Value created per dollar invested |
Using ratios well
- Compare like with like. A ratio means most against the same company’s earlier periods and against businesses with similar models.
- Read them together. A strong current ratio and a rising DSO can mean the liquidity is sitting in receivables that are getting harder to collect.
- Check the inputs. One-off items, a year-end that isn’t typical, or a change in accounting policy can move a ratio without any change in the business.
Financial ratios: questions
- Which financial ratios matter most?
- It depends on the question. A lender looks first at liquidity and coverage: can the business pay what it owes? An owner looks at margins and returns. A controller tracking working capital watches DSO, days in inventory and DPO. The groups on this page follow those questions.
- Why do some ratios use averages?
- When a ratio divides a flow from the income statement, such as sales or cost of goods sold, by a balance from the balance sheet, the balance is averaged over the period so it matches the flow. Ratios built only from balance sheet figures, such as the current ratio, use the balances on one date.
- Are there standard definitions?
- For many ratios, definitions vary in the details: whether debt includes leases, whether DPO uses purchases or cost of goods sold, whether receivables are gross or net. Lenders' covenants usually define the ones they test. Write down the definition you use and keep it consistent from period to period.