My Favorite Financial Ratios

By Michael C. Dennis

Here’s a list and description of liquidity, efficiency, profitability, and leverage ratios, with formulas included:

Liquidity Ratios measure a company's ability to meet short-term obligations.

Current Ratio: ?This ratio measures whether the company has enough assets to cover its short-term liabilities.? Formula for the Current?Ratio = Current?Assets / Current?Liabilities

Quick Ratio (Acid-Test Ratio):? This is a more stringent test of liquidity, excluding inventory, which may not be quickly and easily converted to cash. Formula: Quick?Ratio = (Current?Assets?Inventories) / Current?Liabilities

Cash?Ratio:? This ratio evaluates a company's ability to cover short-term liabilities with its most liquid assets (cash and cash equivalents).? Formula:? Cash Ratio = Cash?and?Cash?Equivalents / Current?Liabilities

Efficiency Ratios measure how well a company uses its assets.

Inventory Turnover Ratio: ?This ratio shows how many times a company sells and replaces its inventory during a period.? The formula is:? Cost?of?Goods?Sold / Average?Inventory

Accounts Receivable Turnover Ratio:? This ratio measures how efficiently a company collects its receivables or how often it collects its average accounts receivable.? The Formula is:? Net Credit Sales / Average?Accounts?Receivable

Asset Turnover Ratio:? This ratio evaluates how efficiently a company uses its assets to generate sales.? The Formula is:?? Net Sales / Average?Total?Assets

Profitability Ratios measure a company's ability to generate profit.

Gross Profit Margin:? This ratio indicates the percentage of revenue remaining after subtracting the cost of goods sold (COGS).? Formula: (Gross Profit / Net Sales) ×100

Net Profit Margin:? This shows the percentage of revenue that remains as profit after all expenses.? The Formula is: (Net?Profit / Net?Sales) ×100

Return on Assets (ROA):? This ratio measures how efficiently a company uses its assets to generate profit. The Formula is: (Net Income / Average?Total?Assets) ×100

Leverage Ratios measure the degree to which a company is financing its operations through debt

Debt-to-Equity Ratio:? This ratio compares the company's total debt to its equity, showing how much debt it uses to finance its assets.? The Formula is:? Total Debt / Total Equity

Debt Ratio:? This ratio indicates what proportion of a company’s assets is financed through debt.? The Formula is:? Total Debt / Total?Assets

Interest Coverage Ratio: ?This ratio measures a company’s ability to cover its interest payments with its earnings before interest and taxes (EBIT).? The Formula is:? Earnings?Before?Interest?and?Taxes / Interest?Expense

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