# Financial Ratios Formulas

## Using the Financial Ratios Formulas Chart

Financial ratios formulas are used to analyse business trends and measure performance of both the business and the management. Our Financial Projections Template provides key financial ratios. The financial ratios formulas chart below acts as a quick reference to help you find information about the most important ratios used in managing a business.

Financial ratios are a relative measure of two or more values taken from the financial statements of a business and can be expressed as a decimal value such as 0.55 or as a percentage e.g. 55%.

One financial ratio viewed in isolation will not tell you a great deal about a business. The key with using financial ratios is to chose the ratios which are most critical to your business, decide on the formula to use, which should be the same as that used by comparable businesses in your industry, and consistently monitor the ratio over time relative to other ratios you have calculated.

The financial ratios formulas table shows the formula for the financial ratio together with its category and a brief explanation.

## Financial Ratios Formulas Guide and Key

• AR: Net accounts receivable
• Cash: Cash and cash equivalents (marketable securities)
• CFO: Cash flow from operational activities
• COGS: Cost of goods sold
• AP: Net accounts payable
• Purchases: Purchases of goods and services = COGS + Change inventory + Overheads
• Working capital: Current assets – current liabilities
• PAT: Profit after tax
• PBT: Profit before tax
• PBIT = EBIT: Profit (Earnings) before interest and tax
• Revenue: Net revenue, sales, turnover
• Fixed assets: Net book value of fixed assets
• Gross profit: Revenue – COGS

* With balance sheet items it is best to use an average value of the opening and closing balances if available.

Financial Ratio Formulas
RatioFormulaWhat it shows
Accounts payable daysAP / (Purchases / 365)How many days it takes to pay suppliers
Accounts receivable daysAR / (Revenue / 365)How many days it takes customers to pay
Asset turnoverRevenue / AssetsAmount of sales generated by assets
Cash cycle (Net trade cycle)AR / (Revenue / 365) + Inventory / (COGS / 365) – AP / (Purchases / 365)Operating cycle – accounts payable days
Cash ratioCash / Current liabilitiesCan cash cover short term debts
CFO ratioCFO / Current liabilitiesCan cash from operational activity cover short term debts
Current ratioCurrent assets / Current liabilitiesCan cash from current assets cover short term debts
Debt to assetsDebt / AssetsPercentage of assets funded by debt
Debt to equityDebt / EquityRatio of debt funding to equity funding
Defensive interval(Cash + AR) / [(COGS + Overheads) / 365]How many days costs can be supported by readily available cash
Fixed asset ratioRevenue / Fixed assetsRevenue generated by fixed assets
GearingDebt / (Debt + Equity)Same as debt to assets. Percentage of assets funded by debt
Gross profit marginGross profit / RevenueGross profit as percentage of sales = real income
Interest coverPBIT / InterestAbility to meet interest payments from earnings
Inventory daysInventory / (COGS / 365)How many days the inventory can support current sales levels
Inventory turnoverRevenue / InventoryLiquidity of and ability to manage inventory
Net profit ratioPAT / RevenuePercentage of revenue left after deducting all costs
Operating cycleAR / (Revenue / 365) + Inventory / (COGS / 365)Accounts receivable days + Inventory day
Operating margin (Return on sales)PBIT / RevenueProfitability of sales independent of finance and tax position
Operating expense ratioOperating expense / RevenuePercentage of revenue need to cover operating expenses
Payables turnoverPurchases / APHow many times payables are paid in a year
Quick ratio (Acid test, Liquidity ratio)(Current assets – Inventory) / Current liabilitiesCan readily available cash cover short term debts
Receivables turnoverRevenue / ARHow many times receivables are collected in a year
Return on assets (ROA or ROI)PAT / AssetsReturn on assets or return on investment
Return on capital employed (ROCE)PBIT/(Assets – Current liabilities) = PBIT / (Equity + Debt)Profitability of capital invested
Return on equity (ROE)PAT/ EquityReturn to equity investors
Working capital turnoverRevenue / Working capitalAmount of sales generated by working capital