Unlocking Financial Insights: Essential Financial Ratios, Formulas, and Calculations for Informed Analysis

Introduction: Financial ratios are key tools in assessing a company’s financial health and performance. By understanding and calculating these ratios, investors, analysts, and CFOs can gain valuable insights into areas such as profitability, liquidity, solvency, and efficiency. In this article, we will delve into several essential financial ratios, providing their formulas and real-life examples to illustrate their significance in financial analysis.

Financial ratios help assess a company’s profitability, efficiency, leverage, and asset management. By calculating and analyzing these ratios, CFOs can gain valuable insights into the financial health of their organization and make informed decisions to drive growth and profitability.

Informed Analysis: The Key to Financial Insights

Financial ratios provide valuable insights into a company’s financial health, performance, and risk profile. By carefully evaluating these ratios and interpreting their implications, stakeholders can make informed decisions about investments, strategic planning, and risk management. However, it is crucial to note that financial ratios should not be relied upon in isolation. A comprehensive analysis should also consider qualitative factors such as management quality, industry trends, and competitive landscape. By combining quantitative and qualitative assessments, stakeholders can gain a holistic understanding of a company’s financial standing and overall prospects.

Profitability Ratios: Key Metrics for Assessing Financial Health and Performance, With Formulas and Examples

Financial Ratios with Formulas and Examples

When using financial ratios, it’s important to consider industry norms, historical trends, and the company’s specific circumstances to gain a comprehensive understanding of its financial health and make informed decisions.

It’s important to note also, that ratios can vary across industries, so it’s crucial to consider industry benchmarks and specific contextual factors when interpreting them.

Here are some financial ratios with their formulas and examples:

1. Profitability Ratios: Profitability ratios measure a company’s ability to generate profits. Here are two important ratios:

• Gross Profit Margin: Formula: (Gross Profit / Revenue) * 100 Example: A company has a gross profit of $500,000 and revenue of $1,000,000. The gross profit margin is ($500,000 / $1,000,000) * 100 = 50%.
• Net Profit Margin: Formula: (Net Income / Revenue) * 100 Example: A company reports a net income of $100,000 and revenue of $500,000. The net profit margin is ($100,000 / $500,000) * 100 = 20%.

Read also: Profitability Ratios: Key Metrics for Assessing Financial Health and Performance, With Formulas and Examples

Read also: Understanding Net Profit Margin (NPM): A Key Metric for Measuring Profitability

2. Liquidity Ratios: Liquidity ratios assess a company’s ability to meet short-term obligations. Here are two common ratios:

• Current Ratio: Formula: Current Assets / Current Liabilities Example: A company has current assets of $800,000 and current liabilities of $400,000. The current ratio is $800,000 / $400,000 = 2.
• Quick Ratio (Acid-Test Ratio): Formula: (Current Assets – Inventory) / Current Liabilities Example: A company has current assets of $600,000, including $200,000 in inventory, and current liabilities of $300,000. The quick ratio is ($600,000 – $200,000) / $300,000 = 1.

3. Solvency Ratios: Solvency ratios assess a company’s long-term financial stability. Here is a crucial ratio:

• Debt-to-Equity Ratio: Formula: Total Debt / Total Equity Example: A company has a total debt of $1,000,000 and total equity of $2,000,000. The debt-to-equity ratio is $1,000,000 / $2,000,000 = 0.5.

4. Efficiency Ratios: Efficiency ratios measure a company’s operational efficiency. Here is a commonly used ratio:

• Asset Turnover Ratio: Formula: Revenue / Average Total Assets Example: A company generates $2,000,000 in revenue with an average total asset value of $1,000,000. The asset turnover ratio is $2,000,000 / $1,000,000 = 2.

Financial ratios offer valuable insights into a company’s financial performance. By calculating and analyzing profitability ratios, liquidity ratios, solvency ratios, and efficiency ratios, investors, analysts, and CFOs can make informed decisions. Understanding the formulas and applying them with real-life examples allows for a comprehensive evaluation of a company’s financial position, aiding in strategic decision-making and promoting long-term success.

5. Return on Equity (ROE): (Net Income / Average Shareholders’ Equity) * 100 Example: A company has a net income of $200,000 and average shareholders’ equity of $1,000,000. The ROE is ($200,000 / $1,000,000) * 100 = 20%.
6. Earnings per Share (EPS): Net Income / Total Outstanding Shares Example: A company has a net income of $500,000 and 100,000 outstanding shares. The EPS is $500,000 / 100,000 = $5 per share.
7. Price-to-Earnings (P/E) Ratio: Market Price per Share / Earnings per Share Example: A company’s stock is trading at $50 per share, and the EPS is $5. The P/E ratio is $50 / $5 = 10.
8. Dividend Yield: Annual Dividends per Share / Market Price per Share Example: A company pays annual dividends of $2 per share, and the stock is trading at $40 per share. The dividend yield is $2 / $40 = 5%.
9. Return on Investment (ROI): (Net Profit / Investment Cost) * 100 Example: An investment generates a net profit of $50,000, and the initial cost of investment is $500,000. The ROI is ($50,000 / $500,000) * 100 = 10%.
10. Operating Margin: (Operating Income / Revenue) * 100 Example: A company has an operating income of $300,000 and revenue of $1,000,000. The operating margin is ($300,000 / $1,000,000) * 100 = 30%.
11. Debt-to-Asset Ratio: Total Debt / Total Assets Example: A company has a total debt of $800,000 and total assets of $2,000,000. The debt-to-asset ratio is $800,000 / $2,000,000 = 0.4.
12. Gross Margin: (Gross Profit / Revenue) * 100 Example: A company has a gross profit of $400,000 and revenue of $1,200,000. The gross margin is ($400,000 / $1,200,000) * 100 = 33.33%.

13. Return on Investment Capital (ROIC): (Net Operating Profit after Taxes (NOPAT) / Invested Capital) * 100 Example: A company has a NOPAT of $500,000 and invested capital of $2,000,000. The ROIC is ($500,000 / $2,000,000) * 100 = 25%.
14. Price-to-Sales (P/S) Ratio: Market Price per Share / Revenue per Share Example: A company’s stock is trading at $20 per share, and the revenue per share is $5. The P/S ratio is $20 / $5 = 4.
15. Return on Marketing Investment (ROMI): (Net Marketing Contribution / Marketing Investment) * 100 Example: A marketing campaign generates a net marketing contribution of $200,000, and the marketing investment is $50,000. The ROMI is ($200,000 / $50,000) * 100 = 400%.
16. Working Capital Turnover Ratio: Revenue / Average Working Capital Example: A company generates $1,000,000 in revenue and has an average working capital of $200,000. The working capital turnover ratio is $1,000,000 / $200,000 = 5.
17. Return on Research and Development (R&D) Investment: R&D Expense / Revenue Example: A company incurs $500,000 in R&D expenses and generates $2,000,000 in revenue. The return on R&D investment is $500,000 / $2,000,000 = 0.25.
18. Debt Service Coverage Ratio (DSCR): Net Operating Income / Total Debt Service Example: A company has a net operating income of $500,000 and total debt service of $400,000. The DSCR is $500,000 / $400,000 = 1.25.
19. Return on Inventory Investment (ROII): (COGS / Average Inventory) * 100 Example: A company has COGS of $800,000 and an average inventory value of $200,000. The ROII is ($800,000 / $200,000) * 100 = 400%.
20. Equity Ratio: Total Equity / Total Assets Example: A company has total equity of $1,500,000 and total assets of $2,000,000. The equity ratio is $1,500,000 / $2,000,000 = 0.75.

21. Return on Capital Employed (ROCE): (Operating Profit / Capital Employed) * 100 Example: A company has an operating profit of $500,000 and capital employed of $2,000,000. The ROCE is ($500,000 / $2,000,000) * 100 = 25%.
22. Inventory Turnover: Cost of Goods Sold (COGS) / Average Inventory Example: A company has COGS of $1,000,000 and an average inventory value of $200,000. The inventory turnover is $1,000,000 / $200,000 = 5.
23. Receivables Turnover: Net Credit Sales / Average Accounts Receivable Example: A company has net credit sales of $2,000,000 and an average accounts receivable value of $500,000. The receivables turnover is $2,000,000 / $500,000 = 4.
24. Payables Turnover: Purchases / Average Accounts Payable Example: A company has purchases of $1,500,000 and an average accounts payable value of $300,000. The payables turnover is $1,500,000 / $300,000 = 5.
25. Cash Conversion Cycle (CCC): Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding Example: A company has 60 days of inventory outstanding, 45 days of sales outstanding, and 30 days of payable outstanding. The CCC is 60 + 45 – 30 = 75 days.
    

    Comprehensive Insight: They offer a holistic view by examining various aspects like profitability, liquidity, leverage, and efficiency, enabling a comprehensive assessment of a company’s performance.

26. Gross Operating Profit (GOP) Margin: (Gross Operating Profit / Revenue) * 100 Example: A company has a gross operating profit of $400,000 and revenue of $1,000,000. The GOP margin is ($400,000 / $1,000,000) * 100 = 40%.
27. Fixed Asset Turnover: Revenue / Net Fixed Assets Example: A company generates $2,000,000 in revenue and has net fixed assets of $1,000,000. The fixed asset turnover is $2,000,000 / $1,000,000 = 2.
28. Return on Research Capital (RORC): Net Income / Research Capital Invested Example: A company has a net income of $500,000 and has invested $1,000,000 in research capital. The RORC is $500,000 / $1,000,000 = 0.5.
29. Price/Book Value Ratio: Market Price per Share / Book Value per Share Example: A company’s stock is trading at $50 per share, and the book value per share is $10. The price/book value ratio is $50 / $10 = 5.
30. EBITDA Margin: (EBITDA / Revenue) * 100 Example: A company has an EBITDA of $500,000 and revenue of $2,000,000. The EBITDA margin is ($500,000 / $2,000,000) * 100 = 25%.

31. Return on Investment (ROI): (Net Profit / Investment) * 100 Example: An investment generates a net profit of $50,000, and the initial investment is $500,000. The ROI is ($50,000 / $500,000) * 100 = 10%.
32. Gross Profit Margin: (Gross Profit / Revenue) * 100 Example: A company has a gross profit of $400,000 and revenue of $1,000,000. The gross profit margin is ($400,000 / $1,000,000) * 100 = 40%.
33. Operating Profit Margin: (Operating Profit / Revenue) * 100 Example: A company has an operating profit of $200,000 and revenue of $800,000. The operating profit margin is ($200,000 / $800,000) * 100 = 25%.
34. Earnings Before Interest and Taxes (EBIT) Margin: (EBIT / Revenue) * 100 Example: A company has an EBIT of $300,000 and revenue of $1,500,000. The EBIT margin is ($300,000 / $1,500,000) * 100 = 20%.
35. Return on Sales (ROS): (Net Income / Revenue) * 100 Example: A company has a net income of $100,000 and revenue of $500,000. The ROS is ($100,000 / $500,000) * 100 = 20%.
36. Return on Assets (ROA): (Net Income / Total Assets) * 100 Example: A company has a net income of $200,000 and total assets of $1,000,000. The ROA is ($200,000 / $1,000,000) * 100 = 20%.
37. Return on Equity (ROE): (Net Income / Shareholders’ Equity) * 100 Example: A company has a net income of $150,000 and shareholders’ equity of $1,500,000. The ROE is ($150,000 / $1,500,000) * 100 = 10%.
38. Debt Ratio: (Total Debt / Total Assets) * 100 Example: A company has total debt of $500,000 and total assets of $1,000,000. The debt ratio is ($500,000 / $1,000,000) * 100 = 50%.
39. Times Interest Earned (TIE) Ratio: (Operating Income / Interest Expense) Example: A company has an operating income of $500,000 and interest expense of $100,000. The TIE ratio is $500,000 / $100,000 = 5.
40. Inventory Turnover: (Cost of Goods Sold / Average Inventory) Example: A company has a cost of goods sold of $800,000 and an average inventory value of $200,000. The inventory turnover is $800,000 / $200,000 = 4.

41. Current Ratio: Current Assets / Current Liabilities Example: A company has current assets of $500,000 and current liabilities of $300,000. The current ratio is $500,000 / $300,000 = 1.67.
42. Quick Ratio (Acid-Test Ratio): (Current Assets – Inventory) / Current Liabilities Example: A company has current assets of $500,000, inventory of $200,000, and current liabilities of $300,000. The quick ratio is ($500,000 – $200,000) / $300,000 = 1.
43. Debt-to-Equity Ratio: Total Debt / Shareholders’ Equity Example: A company has total debt of $1,000,000 and shareholders’ equity of $2,000,000. The debt-to-equity ratio is $1,000,000 / $2,000,000 = 0.5.
44. Times Interest Earned (TIE) Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense Example: A company has EBIT of $500,000 and interest expense of $100,000. The TIE ratio is $500,000 / $100,000 = 5.
45. Gross Profit Margin: (Revenue – Cost of Goods Sold) / Revenue Example: A company has revenue of $1,000,000 and cost of goods sold of $600,000. The gross profit margin is ($1,000,000 – $600,000) / $1,000,000 = 0.4 or 40%.
46. Net Profit Margin: Net Income / Revenue Example: A company has net income of $200,000 and revenue of $1,000,000. The net profit margin is $200,000 / $1,000,000 = 0.2 or 20%.
47. Return on Assets (ROA): Net Income / Total Assets Example: A company has net income of $500,000 and total assets of $2,000,000. The ROA is $500,000 / $2,000,000 = 0.25 or 25%.
48. Return on Investment (ROI): (Net Profit / Investment) * 100 Example: An investment generates a net profit of $100,000, and the initial investment is $500,000. The ROI is ($100,000 / $500,000) * 100 = 20%.
49. Dividend Payout Ratio: Dividends / Net Income Example: A company pays $50,000 in dividends and has a net income of $200,000. The dividend payout ratio is $50,000 / $200,000 = 0.25 or 25%.
50. Price/Earnings (P/E) Ratio: Market Price per Share / Earnings per Share Example: A company’s stock is trading at $50 per share, and the earnings per share is $5. The P/E ratio is $50 / $5 = 10.
    

    Financial ratios serve as powerful tools for analyzing a company’s financial health, performance, and overall standing. By comparing these ratios to industry benchmarks and historical trends, stakeholders can gain valuable insights into the company’s strengths, weaknesses, and potential risks.

51. Cash Ratio: (Cash and Cash Equivalents / Current Liabilities) Example: A company has cash and cash equivalents of $100,000 and current liabilities of $50,000. The cash ratio is $100,000 / $50,000 = 2.
52. Operating Cash Flow Ratio: (Operating Cash Flow / Current Liabilities) Example: A company has operating cash flow of $200,000 and current liabilities of $100,000. The operating cash flow ratio is $200,000 / $100,000 = 2.
53. Return on Total Assets (ROTA): (Net Income / Total Assets) * 100 Example: A company has a net income of $500,000 and total assets of $2,000,000. The ROTA is ($500,000 / $2,000,000) * 100 = 25%.
54. Return on Common Equity (ROCE): (Net Income – Preferred Dividends) / Common Shareholders’ Equity Example: A company has a net income of $300,000, preferred dividends of $50,000, and common shareholders’ equity of $1,000,000. The ROCE is ($300,000 – $50,000) / $1,000,000 = 25%.
55. Dividend Yield: (Dividends per Share / Market Price per Share) * 100 Example: A company pays dividends of $2 per share, and its stock is trading at $40 per share. The dividend yield is ($2 / $40) * 100 = 5%.
56. Price/Sales (P/S) Ratio: Market Price per Share / Sales per Share Example: A company’s stock is trading at $50 per share, and the sales per share is $10. The P/S ratio is $50 / $10 = 5.
57. Asset Turnover Ratio: Revenue / Average Total Assets Example: A company generates $1,000,000 in revenue and has average total assets of $500,000. The asset turnover ratio is $1,000,000 / $500,000 = 2.
58. Equity Multiplier: Total Assets / Common Shareholders’ Equity Example: A company has total assets of $2,000,000 and common shareholders’ equity of $1,000,000. The equity multiplier is $2,000,000 / $1,000,000 = 2.
59. Price/Cash Flow (P/CF) Ratio: Market Price per Share / Operating Cash Flow per Share Example: A company’s stock is trading at $60 per share, and the operating cash flow per share is $6. The P/CF ratio is $60 / $6 = 10.
60. Return on Research and Development (R&D) Expense: Net Income / R&D Expense Example: A company has a net income of $500,000 and incurs $200,000 in R&D expenses. The return on R&D expense is $500,000 / $200,000 = 2.5.

61. Price/Earnings to Growth (PEG) Ratio: (P/E Ratio / Annual Earnings Growth Rate) Example: A company has a P/E ratio of 20 and an annual earnings growth rate of 10%. The PEG ratio is 20 / 10 = 2.
62. Return on Marketing Investment (ROMI): (Net Profit / Marketing Investment) * 100 Example: A marketing campaign generates a net profit of $100,000, and the marketing investment is $50,000. The ROMI is ($100,000 / $50,000) * 100 = 200%.
63. Dividend Payout Ratio: (Dividends / Net Income) * 100 Example: A company pays $50,000 in dividends and has a net income of $200,000. The dividend payout ratio is ($50,000 / $200,000) * 100 = 25%.
64. Operating Expense Ratio: (Operating Expenses / Revenue) * 100 Example: A company has operating expenses of $500,000 and revenue of $1,000,000. The operating expense ratio is ($500,000 / $1,000,000) * 100 = 50%.
65. Gross Margin: (Gross Profit / Revenue) * 100 Example: A company has a gross profit of $400,000 and revenue of $1,000,000. The gross margin is ($400,000 / $1,000,000) * 100 = 40%.
66. Return on Capital (ROC): (Net Operating Profit / Invested Capital) * 100 Example: A company has a net operating profit of $500,000 and invested capital of $2,000,000. The ROC is ($500,000 / $2,000,000) * 100 = 25%.
67. Price/Sales to Growth (PSG) Ratio: (P/S Ratio / Annual Sales Growth Rate) Example: A company has a P/S ratio of 4 and an annual sales growth rate of 8%. The PSG ratio is 4 / 8 = 0.5.
68. Net Profit Margin: (Net Income / Revenue) * 100 Example: A company has a net income of $200,000 and revenue of $1,000,000. The net profit margin is ($200,000 / $1,000,000) * 100 = 20%.
69. Debt-to-EBITDA Ratio: Total Debt / EBITDA Example: A company has total debt of $1,000,000 and EBITDA of $500,000. The debt-to-EBITDA ratio is $1,000,000 / $500,000 = 2.
70. Return on Innovation (ROI): (Net Income / Investment in Innovation) * 100 Example: A company has a net income of $1,000,000 and has invested $500,000 in innovation projects. The ROI is ($1,000,000 / $500,000) * 100 = 200%.

71. Dividend Cover Ratio: Earnings per Share / Dividends per Share Example: A company has earnings per share of $2 and dividends per share of $0.50. The dividend cover ratio is $2 / $0.50 = 4.
72. Price/Book (P/B) Ratio: Market Price per Share / Book Value per Share Example: A company’s stock is trading at $50 per share, and the book value per share is $25. The P/B ratio is $50 / $25 = 2.
73. Return on Capital Employed (ROCE): (Operating Profit / (Total Assets – Current Liabilities)) * 100 Example: A company has an operating profit of $500,000, total assets of $2,000,000, and current liabilities of $300,000. The ROCE is ($500,000 / ($2,000,000 – $300,000)) * 100 = 30.77%.
74. Fixed Asset Turnover: Revenue / Average Fixed Assets Example: A company generates $2,000,000 in revenue and has average fixed assets of $500,000. The fixed asset turnover is $2,000,000 / $500,000 = 4.
75. Earnings per Share (EPS): Net Income / Number of Outstanding Shares Example: A company has a net income of $1,000,000 and 500,000 outstanding shares. The EPS is $1,000,000 / 500,000 = $2.
    

    Accuracy and Precision: Formulas delve deeper into specific financial aspects, offering precise calculations that serve as the foundation for comprehensive analysis.

76. Dividend Yield: Dividends per Share / Market Price per Share Example: A company pays dividends of $2 per share, and its stock is trading at $40 per share. The dividend yield is $2 / $40 = 0.05 or 5%.
77. Price/Cash Flow (P/CF) Ratio: Market Price per Share / Operating Cash Flow per Share Example: A company’s stock is trading at $60 per share, and the operating cash flow per share is $6. The P/CF ratio is $60 / $6 = 10.
78. Return on Research and Development (R&D) Expense: Net Income / R&D Expense Example: A company has a net income of $500,000 and incurs $200,000 in R&D expenses. The return on R&D expense is $500,000 / $200,000 = 2.5.
79. Inventory Turnover: Cost of Goods Sold / Average Inventory Example: A company has a cost of goods sold of $800,000 and an average inventory value of $200,000. The inventory turnover is $800,000 / $200,000 = 4.
80. Debt-to-Equity Ratio: Total Debt / Shareholders’ Equity Example: A company has total debt of $1,000,000 and shareholders’ equity of $2,000,000. The debt-to-equity ratio is $1,000,000 / $2,000,000 = 0.5.

91. Return on Marketing Investment (ROMI): (Net Profit from Marketing / Marketing Investment) * 100 Example: A marketing campaign generates a net profit of $100,000, and the marketing investment is $50,000. The ROMI is ($100,000 / $50,000) * 100 = 200%.
92. Debt Ratio: Total Debt / Total Assets Example: A company has total debt of $500,000 and total assets of $1,000,000. The debt ratio is $500,000 / $1,000,000 = 0.5 or 50%.
93. Quick Ratio: (Current Assets – Inventory) / Current Liabilities Example: A company has current assets of $500,000, inventory of $100,000, and current liabilities of $200,000. The quick ratio is ($500,000 – $100,000) / $200,000 = 2.
94. Working Capital Turnover: Revenue / Working Capital Example: A company generates $1,000,000 in revenue and has a working capital of $200,000. The working capital turnover is $1,000,000 / $200,000 = 5.
95. Return on Market Value of Equity (ROME): Net Income / Market Value of Equity Example: A company has a net income of $500,000 and a market value of equity of $5,000,000. The ROME is $500,000 / $5,000,000 = 0.1 or 10%.
96. Gross Profit Margin: (Gross Profit / Revenue) * 100 Example: A company has a gross profit of $400,000 and revenue of $1,000,000. The gross profit margin is ($400,000 / $1,000,000) * 100 = 40%.
97. Return on Investment (ROI): (Net Profit / Investment) * 100 Example: A company has a net profit of $1,000,000 and an investment of $5,000,000. The ROI is ($1,000,000 / $5,000,000) * 100 = 20%.
98. Accounts Receivable Turnover: Net Credit Sales / Average Accounts Receivable Example: A company has net credit sales of $1,000,000 and an average accounts receivable of $200,000. The accounts receivable turnover is $1,000,000 / $200,000 = 5.
99. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin: (EBITDA / Revenue) * 100 Example: A company has EBITDA of $500,000 and revenue of $1,000,000. The EBITDA margin is ($500,000 / $1,000,000) * 100 = 50%.
    

    To effectively utilize financial ratios, investors and analysts must carefully calculate the ratios and compare them to industry standards and historical trends. By analyzing trends over time, stakeholders can identify potential areas of concern or opportunities for improvement.

100. Fixed Charge Coverage Ratio: (EBIT + Lease Payments) / (Interest Expense + Lease Payments) Example: A company has EBIT of $1,000,000, lease payments of $200,000, interest expense of $100,000, and lease payments of $200,000. The fixed charge coverage ratio is ($1,000,000 + $200,000) / ($100,000 + $200,000) = 2.
101. Asset Turnover: Revenue / Average Total Assets Example: A company generates $2,000,000 in revenue and has average total assets of $1,000,000. The asset turnover is $2,000,000 / $1,000,000 = 2.
102. Return on Research and Development (R&D) Investment: Net Income / R&D Expense Example: A company has a net income of $1,000,000 and incurs $500,000 in R&D expenses. The return on R&D investment is $1,000,000 / $500,000 = 2.
103. Earnings Before Interest and Taxes (EBIT) Margin: (EBIT / Revenue) * 100 Example: A company has EBIT of $500,000 and revenue of $1,000,000. The EBIT margin is ($500,000 / $1,000,000) * 100 = 50%.
104. Return on Sales (ROS): Net Income / Revenue Example: A company has a net income of $500,000 and revenue of $2,000,000. The ROS is $500,000 / $2,000,000 = 0.25 or 25%.
105. Debt Service Coverage Ratio (DSCR): Net Operating Income / Total Debt Service Example: A company has a net operating income of $1,000,000 and total debt service of $500,000. The DSCR is $1,000,000 / $500,000 = 2.
106. Free Cash Flow (FCF) Margin: (FCF / Revenue) * 100 Example: A company has free cash flow of $500,000 and revenue of $2,000,000. The FCF margin is ($500,000 / $2,000,000) * 100 = 25%.
107. Current Ratio: Current Assets / Current Liabilities Example: A company has current assets of $1,000,000 and current liabilities of $500,000. The current ratio is $1,000,000 / $500,000 = 2.
108. Return on Assets (ROA): Net Income / Average Total Assets Example: A company has a net income of $1,000,000 and average total assets of $5,000,000. The ROA is $1,000,000 / $5,000,000 = 0.2 or 20%.
109. Capital Adequacy Ratio (CAR): Tier 1 Capital / Risk-Weighted Assets Example: A bank has Tier 1 capital of $10,000,000 and risk-weighted assets of $50,000,000. The CAR is $10,000,000 / $50,000,000 = 0.2 or 20%.
110. Price/Earnings (P/E) Ratio: Market Price per Share / Earnings per Share Example: A company’s stock is trading at $50 per share, and the earnings per share is $5. The P/E ratio is $50 / $5 = 10.
111. Return on Equity (ROE): Net Income / Shareholders’ Equity Example: A company has a net income of $1,000,000 and shareholders’ equity of $5,000,000. The ROE is $1,000,000 / $5,000,000 = 0.2 or 20%.
112. Gross Margin: (Revenue – Cost of Goods Sold) / Revenue Example: A company has revenue of $1,000,000 and cost of goods sold of $600,000. The gross margin is ($1,000,000 – $600,000) / $1,000,000 = 0.4 or 40%.
113. Return on Investment Capital (ROIC): Net Operating Profit After Tax (NOPAT) / Invested Capital Example: A company has a NOPAT of $500,000 and invested capital of $2,000,000. The ROIC is $500,000 / $2,000,000 = 0.25 or 25%.
114. Quick Assets Ratio: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities Example: A company has $200,000 in cash, $100,000 in marketable securities, $300,000 in accounts receivable, and $400,000 in current liabilities. The quick assets ratio is ($200,000 + $100,000 + $300,000) / $400,000 = 1.75.
115. Return on Sales and Assets (ROSA): Net Income / (Revenue * Average Total Assets) Example: A company has a net income of $500,000, revenue of $2,000,000, and average total assets of $1,500,000. The ROSA is $500,000 / ($2,000,000 * $1,500,000) = 0.1667 or 16.67%.
116. Operating Cash Flow Margin: Operating Cash Flow / Revenue Example: A company has operating cash flow of $300,000 and revenue of $1,000,000. The operating cash flow margin is $300,000 / $1,000,000 = 0.3 or 30%.
117. Price/Sales (P/S) Ratio: Market Price per Share / Sales per Share Example: A company’s stock is trading at $20 per share, and the sales per share is $5. The P/S ratio is $20 / $5 = 4.
118. Return on Human Capital: (Revenue – Total Compensation) / Total Compensation Example: A company generates $1,000,000 in revenue and pays $200,000 in total compensation to its employees. The return on human capital is ($1,000,000 – $200,000) / $200,000 = 4.
119. Debt Service Coverage Ratio (DSCR): Net Operating Income / Debt Service Example: A company has a net operating income of $1,000,000 and debt service of $500,000. The DSCR is $1,000,000 / $500,000 = 2.
120. Profit Margin: Net Income / Revenue Example: A company has a net income of $500,000 and revenue of $2,000,000. The profit margin is $500,000 / $2,000,000 = 0.25 or 25%.

Business Valuation to Determine Your Company’s Worth | With Formulas and Calculations

Conclusion

• financial ratios provide further insights into a company’s performance, efficiency, capital utilization, and risk management.
• financial ratios provide insights into liquidity, solvency, profitability, and market valuation.
• financial ratios cover a range of financial aspects, including cash management, profitability, valuation, and capital utilization.
• financial ratios cover various aspects such as growth, marketing effectiveness, expenses, and innovation.
• financial ratios cover a wide range of areas including dividends, book value, capital utilization, earnings, and asset management.
• financial ratios cover various aspects such as marketing effectiveness, debt management, liquidity, profitability, and investment performance.

Financial ratios cover areas such as asset management, profitability, debt coverage, liquidity, and valuation.

Financial ratios cover areas such as shareholder returns, profitability, liquidity, asset efficiency, and capital structure. By leveraging these ratios, CFOs can gain deeper insights into their company’s financial performance

Financial ratios offer valuable insights into a company’s financial performance. By calculating and analyzing profitability ratios, liquidity ratios, solvency ratios, and efficiency ratios, investors, analysts, and CFOs can make informed decisions. Understanding the formulas and applying them with real-life examples allows for a comprehensive evaluation of a company’s financial position, aiding in strategic decision-making and promoting long-term success.

The importance of each—financial ratios, formulas, and calculations—rests on their ability to uncover insights, facilitate comparisons, and provide a basis for informed analysis. Depending on the analytical requirements, one element might take precedence over the others, emphasizing its significance in a particular financial assessment or decision-making scenario.

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