15 Financial Ratios Formulas To Analyse Any Business | FourWeekMBA (2024)

Price-to-Earnings (P/E) RatioValuationMeasures a company’s current share price relative to its earnings per share (EPS).Assess valuation and growth prospects.A P/E ratio of 15 means investors pay $15 for every $1 of earnings.P/E = Price per Share / Earnings per SharePrice-to-Sales (P/S) RatioValuationCompares a company’s market capitalization to its total sales revenue.Evaluate valuation when earnings are not meaningful.A P/S ratio of 1 indicates the company’s market cap is equal to its annual revenue.P/S = Market Cap / Total RevenuePrice-to-Book (P/B) RatioValuationCompares a company’s market price per share to its book value per share.Assess valuation relative to tangible assets.A P/B ratio of 2 suggests the stock is trading at twice its book value.P/B = Price per Share / Book Value per SharePrice/Earnings to Growth (PEG) RatioValuation/GrowthCombines the P/E ratio with the expected earnings growth rate to assess valuation with growth prospects.Evaluate valuation relative to expected growth.A PEG ratio of 0.75 indicates potential undervaluation considering growth.PEG = P/E Ratio / Earnings Growth RateDividend YieldDividendMeasures the annual dividend income relative to the stock’s price.Evaluate income potential from dividend stocks.A 3% dividend yield means $3 in annual dividends for every $100 invested.Dividend Yield = Annual Dividend per Share / Price per ShareDividend Payout RatioDividendShows the proportion of earnings paid out as dividends.Assess sustainability of dividend payments.A 50% payout ratio means half of earnings are distributed as dividends.Payout Ratio = Dividends / EarningsDebt-to-Equity RatioSolvencyMeasures the proportion of a company’s debt to its equity.Evaluate the financial risk and leverage.A debt-to-equity ratio of 0.5 suggests moderate leverage.Debt-to-Equity Ratio = Total Debt / Shareholders’ EquityCurrent RatioLiquidityCompares a company’s current assets to its current liabilities.Assess short-term liquidity and solvency.A current ratio of 2 indicates good liquidity with twice as many assets as liabilities.Current Ratio = Current Assets / Current LiabilitiesQuick Ratio (Acid-Test Ratio)LiquiditySimilar to the current ratio but excludes inventory from current assets.Assess immediate liquidity without relying on inventory.A quick ratio of 1 means current liabilities can be fully covered by liquid assets.Quick Ratio = (Current Assets – Inventory) / Current LiabilitiesReturn on Equity (ROE)ProfitabilityMeasures a company’s profitability relative to shareholders’ equity.Assess how efficiently equity is used to generate profits.An ROE of 15% indicates a company generated a 15% return on shareholders’ equity.ROE = Net Income / Shareholders’ EquityReturn on Assets (ROA)ProfitabilityMeasures a company’s profitability relative to its total assets.Assess how efficiently assets are used to generate profits.An ROA of 10% means a company earned a 10% return on total assets.ROA = Net Income / Total AssetsGross MarginProfitabilityMeasures the percentage of revenue that remains after subtracting the cost of goods sold (COGS).Assess a company’s ability to control production costs.A gross margin of 30% indicates a 70% profit on COGS.Gross Margin = (Revenue – COGS) / RevenueOperating MarginProfitabilityMeasures the percentage of revenue that remains after operating expenses are deducted.Assess a company’s operational efficiency.An operating margin of 15% means 15% of revenue remains as profit after operating expenses.Operating Margin = Operating Income / RevenueNet Profit MarginProfitabilityMeasures the percentage of revenue that remains as profit after all expenses, including taxes and interest.Assess overall profitability.A net profit margin of 8% means 8% of revenue is profit after all expenses.Net Profit Margin = Net Income / RevenueEarnings Before Interest and Taxes (EBIT) MarginProfitabilityMeasures the percentage of revenue that remains before interest and taxes are deducted.Assess operating performance without considering financing decisions.An EBIT margin of 20% indicates strong operational performance.EBIT Margin = EBIT / RevenueEarnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) MarginProfitabilityMeasures the percentage of revenue that remains before interest, taxes, depreciation, and amortization are deducted.Assess operating performance with a focus on cash flow.An EBITDA margin of 25% indicates efficient operation.EBITDA Margin = EBITDA / RevenueFree Cash Flow (FCF) MarginCash FlowMeasures the percentage of revenue that remains as free cash flow after all operating and capital expenses.Evaluate a company’s ability to generate cash.An FCF margin of 10% means 10% of revenue is available as free cash flow.FCF Margin = FCF / RevenuePrice-to-Cash Flow (P/CF) RatioValuationCompares a company’s market price per share to its cash flow per share.Assess valuation based on cash flow.A P/CF ratio of 8 suggests investors pay $8 for every $1 of cash flow.P/CF = Price per Share / Cash Flow per ShareInventory Turnover RatioEfficiencyMeasures how quickly a company sells and replaces its inventory.Assess inventory management efficiency.An inventory turnover ratio of 5 suggests inventory is sold and replaced 5 times a year.Inventory Turnover Ratio = Cost of Goods Sold / Average InventoryAccounts Receivable Turnover RatioEfficiencyMeasures how quickly a company collects payments from its customers.Assess accounts receivable collection efficiency.An AR turnover ratio of 6 suggests accounts receivable turn over 6 times a year.Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts ReceivableTotal Asset Turnover RatioEfficiencyMeasures how efficiently a company uses its assets to generate revenue.Evaluate asset utilization and efficiency.A total asset turnover ratio of 0.8 suggests assets generate 80% of revenue annually.Total Asset Turnover Ratio = Revenue / Total AssetsOperating Cash Flow to Sales RatioCash FlowMeasures the percentage of sales revenue that is converted into operating cash flow.Assess the conversion of sales into cash.An operating cash flow to sales ratio of 15% means 15% of sales become cash flow.Operating Cash Flow to Sales Ratio = Operating Cash Flow / RevenueOperating Income MarginProfitabilityMeasures the percentage of revenue that remains as operating income before interest and taxes.Assess profitability from core operations.An operating income margin of 12% suggests strong operational profitability.Operating Income Margin = Operating Income / RevenueDebt RatioSolvencyCompares a company’s total debt to its total assets.Assess the proportion of assets financed by debt.A debt ratio of 0.4 indicates 40% of assets are financed by debt.Debt Ratio = Total Debt / Total AssetsQuick Assets RatioLiquidityCompares a company’s quick assets (cash, marketable securities, and receivables) to its current liabilities.Assess immediate liquidity without relying on inventory.A quick assets ratio of 1.2 indicates strong liquidity.Quick Assets Ratio = (Cash + Marketable Securities + Receivables) / Current LiabilitiesEarnings Per Share (EPS)ProfitabilityRepresents the portion of a company’s profit allocated to each outstanding share of common stock.Assess profitability on a per-share basis.EPS of $2 means $2 of profit for each outstanding share.EPS = Net Income / Number of Shares OutstandingEarnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)ProfitabilityMeasures a company’s operating earnings before non-operating expenses.Assess operating profitability.EBITDA of $500,000 indicates strong operating earnings.EBITDA = Earnings Before Interest, Taxes, Depreciation, and AmortizationEarnings Before Interest and Taxes (EBIT)ProfitabilityRepresents a company’s operating profit before interest and taxes.Assess core operational profitability.EBIT of $1 million indicates strong operating profit.EBIT = Earnings Before Interest and TaxesOperating Cash Flow (OCF)Cash FlowMeasures the cash generated or used by a company’s core operating activities.Evaluate cash flow from operations.OCF of $800,000 indicates positive cash flow from operations.OCF = Operating Cash FlowFree Cash Flow (FCF)Cash FlowRepresents the cash generated or used by a company after capital expenditures.Assess cash available for investors or debt reduction.FCF of $400,000 indicates cash available for dividends or debt reduction.FCF = Free Cash FlowReturn on Investment (ROI)ProfitabilityMeasures the return on an investment relative to its cost.Evaluate the efficiency of an investment.An ROI of 20% indicates a 20% return on an investment.ROI = (Gain from Investment – Cost of Investment) / Cost of InvestmentReturn on Capital Employed (ROCE)ProfitabilityMeasures the return generated from the capital employed in a business.Assess the efficiency of capital utilization.ROCE of 15% indicates a 15% return on capital employed.ROCE = Earnings Before Interest and Taxes (EBIT) / Capital EmployedOperating CycleEfficiencyMeasures the time it takes for a company to convert inventory to cash.Assess the efficiency of inventory and receivables management.An operating cycle of 45 days suggests efficient working capital management.Operating Cycle = Average Days of Inventory + Average Days of ReceivablesCash Conversion Cycle (CCC)EfficiencyMeasures the time it takes for a company to convert inventory and receivables into cash, considering payables.Assess cash flow efficiency and liquidity management.A CCC of 30 days indicates quick conversion of assets into cash.CCC = Operating Cycle – Average Days of PayablesNet Working CapitalLiquidityRepresents the difference between a company’s current assets and current liabilities.Assess liquidity and short-term solvency.Net working capital of $500,000 indicates good short-term liquidity.Net Working Capital = Current Assets – Current LiabilitiesQuick Liquidity RatioLiquidityCompares a company’s quick assets (cash, marketable securities, and receivables) to its current liabilities.Assess immediate liquidity without relying on inventory.A quick liquidity ratio of 1.5 indicates strong immediate liquidity.Quick Liquidity Ratio = (Cash + Marketable Securities + Receivables) / Current LiabilitiesTimes Interest Earned (TIE)SolvencyMeasures a company’s ability to cover interest payments with its earnings before interest and taxes.Assess solvency and ability to meet interest obligations.A TIE ratio of 4 indicates earnings are four times the interest expenses.TIE = Earnings Before Interest and Taxes (EBIT) / Interest ExpensePrice-to-Operating Cash Flow (P/OCF) RatioValuationCompares a company’s market price per share to its operating cash flow per share.Assess valuation based on operating cash flow.A P/OCF ratio of 10 suggests investors pay $10 for every $1 of operating cash flow.P/OCF = Price per Share / Operating Cash Flow per SharePrice-to-Free Cash Flow (P/FCF) RatioValuationCompares a company’s market price per share to its free cash flow per share.Assess valuation based on free cash flow.A P/FCF ratio of 12 suggests investors pay $12 for every $1 of free cash flow.P/FCF = Price per Share / Free Cash Flow per ShareReturn on Sales (ROS)ProfitabilityMeasures the percentage of revenue that remains as profit after all expenses.Assess overall profitability.An ROS of 12% means 12% of revenue is profit after all expenses.ROS = Net Income / Total Revenue