Financial Analysis/Concepts

Ratio Concepts

20 ratios, fully explained

Each ratio includes the formula, a worked example with real numbers, interpretation guidance, benchmarks, and industry context. Free — no sign-in required.

Liquidity Ratios

3 ratios in this category

1. Current Ratio

Formula: Current Ratio = Current Assets / Current Liabilities

Calculation Example

Sunrise Electronics has Current Assets of $450,000 and Current Liabilities of $180,000 → Current Ratio = $450,000 / $180,000 = 2.50

What It Means

Measures ability to pay short-term obligations with short-term assets. A ratio of 2.50 means the company has $2.50 in current assets for every $1.00 of current liabilities.

Benchmark

Good: > 2.0Warning: 1.0 – 2.0Danger: < 1.0

Industry Context

Retail companies often run 1.2–1.5 due to fast inventory turnover. Tech companies frequently exceed 3.0 with large cash reserves.

2. Quick Ratio (Acid-Test Ratio)

Formula: Quick Ratio = (Current Assets − Inventory) / Current Liabilities

Calculation Example

Sunrise Electronics: (CA $450,000 − Inv $120,000) / CL $180,000 = $330,000 / $180,000 = 1.83

What It Means

A stricter liquidity test that excludes inventory (less liquid). Shows if a company can meet short-term obligations without selling inventory.

Benchmark

Good: > 1.0Warning: 0.5 – 1.0Danger: < 0.5

Industry Context

Grocery and retail chains naturally have lower quick ratios due to high inventory. Service companies and software firms typically exceed 1.5.

3. Cash Ratio

Formula: Cash Ratio = Cash & Cash Equivalents / Current Liabilities

Calculation Example

Sunrise Electronics: Cash $95,000 / CL $180,000 = 0.53

What It Means

The most conservative liquidity measure. Shows how much of current liabilities could be paid immediately with cash on hand.

Benchmark

Good: > 0.5Warning: 0.2 – 0.5Danger: < 0.2

Industry Context

Most companies intentionally keep cash ratios low (0.1–0.5) to avoid idle cash. Tech giants like Apple maintain unusually high cash ratios.

Profitability Ratios

5 ratios in this category

4. Gross Profit Margin

Formula: Gross Profit Margin = Gross Profit / Revenue × 100

Calculation Example

Revenue $2,400,000 − COGS $1,560,000 = Gross Profit $840,000 → $840,000 / $2,400,000 = 35.0%

What It Means

Percentage of revenue remaining after cost of goods sold. Shows how efficiently a company produces or sources its products.

Benchmark

Good: Depends on industryWarning: Declining trendDanger: Negative

Industry Context

Software: 60–80% | Retail: 20–35% | Grocery: 20–28% | Manufacturing: 25–40%

5. Net Profit Margin

Formula: Net Profit Margin = Net Income / Revenue × 100

Calculation Example

Net Income $192,000 / Revenue $2,400,000 = 8.0%

What It Means

Percentage of each dollar of revenue that becomes profit after ALL expenses, taxes, and interest.

Benchmark

Good: > 10%Warning: 3 – 10%Danger: < 3% or negative

Industry Context

Airlines: 2–5% | Retail: 2–6% | Technology: 15–30% | Pharmaceuticals: 15–25%

6. Return on Assets (ROA)

Formula: ROA = Net Income / Total Assets × 100

Calculation Example

Net Income $192,000 / Total Assets $1,800,000 = 10.7%

What It Means

How efficiently management uses assets to generate profit. Higher ROA = better asset utilization.

Benchmark

Good: > 10%Warning: 5 – 10%Danger: < 5%

Industry Context

Asset-heavy industries (utilities, manufacturing) naturally have lower ROA (2–5%). Asset-light industries (software, consulting) can achieve 15–25%.

7. Return on Equity (ROE)

Formula: ROE = Net Income / Stockholders' Equity × 100

Calculation Example

Net Income $192,000 / Equity $960,000 = 20.0%

What It Means

Returns generated for shareholders on their invested equity. Key metric for equity investors.

Benchmark

Good: > 15%Warning: 10 – 15%Danger: < 10%

Industry Context

Banks target 10–15%. Technology companies often exceed 30%. Highly leveraged companies can show artificially high ROE.

8. EBITDA Margin

Formula: EBITDA Margin = EBITDA / Revenue × 100 (EBITDA = Operating Income + D&A)

Calculation Example

EBITDA $336,000 / Revenue $2,400,000 = 14.0%

What It Means

Earnings before Interest, Taxes, Depreciation, and Amortization as a % of revenue. Removes non-cash charges to show operating cash-generating ability. Commonly used in M&A and valuation.

Benchmark

Good: > 15%Warning: 8 – 15%Danger: < 8%

Industry Context

Telecom: 30–40% | Software SaaS: 15–30% | Retail: 5–12%

Leverage Ratios

4 ratios in this category

9. Debt-to-Equity Ratio

Formula: Debt-to-Equity = Total Debt / Stockholders' Equity

Calculation Example

Total Liabilities $840,000 / Equity $960,000 = 0.875

What It Means

How much debt the company uses relative to equity. Higher ratio = more financial risk and more leverage.

Benchmark

Good: < 1.0Warning: 1.0 – 2.0Danger: > 2.0

Industry Context

Utilities and REITs: 1.5–3.0 (capital-intensive). Tech companies often < 0.5. Banks appear highly leveraged (10:1+) but use different measures.

10. Debt-to-Assets Ratio

Formula: Debt-to-Assets = Total Debt / Total Assets

Calculation Example

Total Liabilities $840,000 / Total Assets $1,800,000 = 0.467

What It Means

Proportion of assets financed by debt (creditors). Shows how leveraged a company's balance sheet is.

Benchmark

Good: < 0.5Warning: 0.5 – 0.7Danger: > 0.7

Industry Context

Manufacturing: 0.3–0.6 | Airlines: 0.7–0.85 | Technology: 0.2–0.4

11. Interest Coverage Ratio

Formula: Interest Coverage = EBIT / Interest Expense

Calculation Example

EBIT $264,000 / Interest Expense $36,000 = 7.33×

What It Means

How many times operating profit covers interest payments. Low ratio = risk of defaulting on interest.

Benchmark

Good: > 5×Warning: 2× – 5×Danger: < 2×

Industry Context

Lenders typically require > 3×. Investment-grade companies commonly exceed 8×. Highly leveraged buyouts may operate at 2–3×.

12. Times Interest Earned

Formula: Times Interest Earned = Operating Income / Interest Expense

Calculation Example

Operating Income $264,000 / Interest Expense $36,000 = 7.33×

What It Means

Confirms whether operating income is sufficient to service debt. Often used interchangeably with Interest Coverage.

Benchmark

Good: > 5×Danger: < 2×

Industry Context

Some versions use EBIT; others use operating income before tax. The interpretation is the same — higher is safer.

Note: Often used interchangeably with Interest Coverage Ratio (#11). Some versions use EBIT; others use operating income.

Efficiency Ratios

5 ratios in this category

13. Asset Turnover

Formula: Asset Turnover = Revenue / Total Assets

Calculation Example

Revenue $2,400,000 / Total Assets $1,800,000 = 1.33×

What It Means

Revenue generated per dollar of assets. Measures how effectively a company deploys its asset base.

Benchmark

Good: > 1.0 for mostWarning: < 0.5

Industry Context

Retail (Walmart): ~2.5× | Technology: 0.5–1.0× | Banks: < 0.2×

14. Inventory Turnover

Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory

Calculation Example

COGS $1,560,000 / Avg Inventory ((120,000 + 108,000) / 2 = $114,000) = 13.7×

What It Means

How many times inventory is sold and replaced in a period. Higher = faster moving inventory.

Benchmark

Good: > 8× for mostWarning: < 4×Danger: < 2×

Industry Context

Grocery: 15–25× | Electronics: 6–10× | Luxury goods: 1–3×

15. Days Inventory Outstanding (DIO)

Formula: DIO = 365 / Inventory Turnover

Calculation Example

365 / 13.7 = 26.6 days

What It Means

Average number of days inventory is held before being sold. Lower = more efficient.

Benchmark

Good: < 30 days (varies)Warning: > 60 daysDanger: > 90 days

Industry Context

Fast food: 5–15 days | Electronics: 30–60 days | Aerospace: 100–200 days

16. Days Sales Outstanding (DSO)

Formula: DSO = Accounts Receivable / (Revenue / 365)

Calculation Example

AR $160,000 / ($2,400,000 / 365) = $160,000 / $6,575 = 24.3 days

What It Means

Average days to collect payment after a sale. Lower = faster collection.

Benchmark

Good: < 30 daysWarning: 30 – 60 daysDanger: > 60 days

Industry Context

Retail (cash sales): 0–5 days | B2B Software: 30–60 days | Construction: 45–90 days

17. Accounts Payable Turnover

Formula: AP Turnover = COGS / Average Accounts Payable

Calculation Example

COGS $1,560,000 / Avg AP ((84,000 + 96,000) / 2 = $90,000) = 17.3×

What It Means

How quickly a company pays its suppliers. Higher = paying faster; lower = taking longer to pay (preserving cash).

Benchmark

Good: Align with supplier termsWarning: Very low may signal cash trouble

Industry Context

Retail: 8–15× | Manufacturing: 6–10× | Technology: 4–8×

Market Ratios

5 ratios in this category

18. Earnings Per Share (EPS)

Formula: EPS = Net Income / Weighted Average Shares Outstanding

Calculation Example

Net Income $192,000,000 / Shares 80,000,000 = $2.40 per share

What It Means

Profit attributable to each share of common stock. Widely used to compare profitability across companies.

Benchmark

Good: Positive and growingWarning: Declining trendDanger: Negative

Industry Context

EPS varies enormously by company size. Compare EPS growth rate, not absolute value, across companies.

19. Price-to-Earnings Ratio (P/E)

Formula: P/E Ratio = Stock Price / Earnings Per Share

Calculation Example

Stock Price $38.40 / EPS $2.40 = 16.0×

What It Means

How much investors pay per dollar of earnings. High P/E = high growth expectations OR overvaluation. Low P/E = value stock OR low growth.

Benchmark

Good (value): < 20×High growth: 30 – 50×Danger: Negative or > 100×

Industry Context

S&P 500 historical average ~15–18×. Tech growth stocks: 30–100×. Utilities: 10–15×.

20. Book Value Per Share

Formula: Book Value Per Share = Stockholders' Equity / Shares Outstanding

Calculation Example

Equity $960,000,000 / Shares 80,000,000 = $12.00

What It Means

Net asset value of the company per share (equity divided by shares). Represents theoretical liquidation value per share.

Benchmark

Context: Compare to market price via P/B ratio

Industry Context

Book value is most meaningful for asset-heavy companies (banks, manufacturers). Growth companies often trade far above book value.

21. Price-to-Book Ratio (P/B)

Formula: P/B Ratio = Stock Price / Book Value Per Share

Calculation Example

Stock Price $38.40 / Book Value $12.00 = 3.20×

What It Means

Compares market value to book (accounting) value. P/B > 1 means the market values the company above its net assets.

Benchmark

Good: 1 – 3× (most industries)Warning: < 1× (distressed)Note: High P/B OK for asset-light businesses

Industry Context

Banks: 0.8–1.5× | Technology: 5–15× | Berkshire Hathaway: ~1.5×

22. Dividend Yield

Formula: Dividend Yield = Annual Dividend Per Share / Stock Price × 100

Calculation Example

Annual Dividend $0.96 / Stock Price $38.40 = 2.5%

What It Means

Income return from dividends as a percentage of stock price. High yield = income stock; zero yield = growth stock.

Benchmark

Good (income): 2 – 5%Warning: > 8% (may be unsustainable)Growth-oriented: 0%

Industry Context

Utilities: 3–6% | Technology growth stocks: 0–1% | REITs: 4–8%

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