Financial Ratios Calculator
FINANCIAL RATIOS DEFINITIONS
Use these ratios to gauge your solvency, liquidity,
operational efficiency and profitability. They are also useful measures to
compare your business with others in your industry.
Profitability Ratios
Gross profit margin Formula:
Gross profit/Sales
This important ratio measures your profitability at the most
basic level. Your total gross profit total ( which is net sales - cost of goods
sold) compared to your net sales . A ratio less than one means you are selling
your product for less than it costs to produce. If this ratio is remains less
than one, you will not achieve profitability regardless of your volume or the
efficiency of the rest of your business.
Operating profit margin
Formula:
Operating income/Sales
This ratio measures your profitability based on your
earnings before interest and tax (EBIT). This measure is used to gauge the
efficiency of the business before taking any financing means into account (such
as debt financing and tax considerations). This ratio is often used to compare
the operating efficiency between similar businesses.
Net profit margin Formula:
Net income/Sales
Often referred to as the bottom line, this ratio takes all
expenses into account including interest.
Liquidity Ratios
Current ratio Formula:Current
assets/Current liabilities
Your current ratio helps you determine if you have enough
working capital to meet your short term financial obligations. A general rule
of thumb is to have a current ratio of 2.0. Although this will vary by business
and industry, a number above two may indicate a poor use of capital. A current
ratio under two may indicate an inability to pay current financial obligations
with a measure of safety.
Quick ratio Formula:
(Current assets - Inventory)/Liabilities
Also known as the 'Acid Test', your Quick Ratio helps gauge
your immediate ability to pay your financial obligations. Quick Ratios below
0.50 indicate a risk of running out of working capital and a risk of not
meeting your current obligations. While industries and businesses vary widely,
0.50 to 1.0 are generally considered acceptable Quick Ratios.
Operating Ratios
Inventory turnover ratio Formula:
Cost of goods sold/Inventory
This ratio measures the number of times your inventory
'turned-over' during a time period. Generally, the higher this ratio the better
your use of inventory. Low numbers indicate a large amount of capital tied up
in inventory that may be more efficiently used elsewhere.
Sales to receivables ratio Formula:
Net sales/Net receivables
This ratio measures the number of times your receivables
'turned over'. The higher the number, the more efficient you are at collecting
your accounts receivable. A ratio that is too high or one that is increasing
over time, may indicate an inefficient use of your working capital. It is
important to compare this ratio to other businesses in your industry.
Times interest earned Formula:
Profit before interest and taxes/Total int. charges
TIE may be used by bankers to assess your ability to pay
your liabilities. The TIE ratio determines how many times during the year your
business has earned the annual interest costs associated with servicing its
debt. Your banker will be looking for
your TIE ratio to be 2.0 or greater, showing that your business is earning the
interest charges two or more times each year.
Return on assets Formula:
Net income before taxes/Total assets at beginning of period
This ratio helps show how assets are being used to generate
profits. One of the most common financial measures, it can be an effective tool
to compare the profitability of two companies. If your return on assets is
lower than a competitor, it may be an indication that they have found a more
efficient means to operate through financing, technology, quality control or
inventory management.
Return on equity Formula:
Net income/Net worth at beginning of period
Return On Equity is often used to determine if a company consumes
cash or creates assets. Return On Equity
can also help you evaluate trends in a business. And ROE can also be used to
compare the performance between companies in the same industry.
Return on investment (ROI) ratio
The ROI is perhaps the most important ratio of all. It is
the percentage of return on funds invested in the business by its owners. In
short, this ratio tells the owner whether or not all the effort put into the
business has been worthwhile. If the ROI is less than the rate of return on an
alternative, risk-free investment such as a bank savings account, the owner may
be wiser to sell the company, put the money in such a savings instrument, and
avoid the daily struggles of business management.
Solvency Ratios
Debt to worth ratio Formula:Total
liabilities/Net worth
Also called the leverage ratio, it is used to help describe
how much debt is used to finance the business. While some debt may be prudent,
depending on too much debt financing can increase risk.
Working capital Formula:
Current assets - Current liabilities
Working capital is used by a lender to help gauge the
ability of a company to weather difficult financial periods. Working capital is
calculated by subtracting current liabilities from current assets. Due to
differences in businesses and the fact that working capital is not a ratio but
an absolute amount, it is difficult to predict the ideal amount of working
capital for your business without making use of other financial measures.
(Including the Quick Ratio and the Current Ratio.)
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