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.
| Ratio | Formula | What it shows |
|---|---|---|
| Accounts payable days | AP / (Purchases / 365) | How many days it takes to pay suppliers |
| Accounts receivable days | AR / (Revenue / 365) | How many days it takes customers to pay |
| Asset turnover | Revenue / Assets | Amount 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 ratio | Cash / Current liabilities | Can cash cover short term debts |
| CFO ratio | CFO / Current liabilities | Can cash from operational activity cover short term debts |
| Current ratio | Current assets / Current liabilities | Can cash from current assets cover short term debts |
| Debt to assets | Debt / Assets | Percentage of assets funded by debt |
| Debt to equity | Debt / Equity | Ratio 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 ratio | Revenue / Fixed assets | Revenue generated by fixed assets |
| Gearing | Debt / (Debt + Equity) | Same as debt to assets. Percentage of assets funded by debt |
| Gross profit margin | Gross profit / Revenue | Gross profit as percentage of sales = real income |
| Interest cover | PBIT / Interest | Ability to meet interest payments from earnings |
| Inventory days | Inventory / (COGS / 365) | How many days the inventory can support current sales levels |
| Inventory turnover | Revenue / Inventory | Liquidity of and ability to manage inventory |
| Net profit ratio | PAT / Revenue | Percentage of revenue left after deducting all costs |
| Operating cycle | AR / (Revenue / 365) + Inventory / (COGS / 365) | Accounts receivable days + Inventory day |
| Operating margin (Return on sales) | PBIT / Revenue | Profitability of sales independent of finance and tax position |
| Operating expense ratio | Operating expense / Revenue | Percentage of revenue need to cover operating expenses |
| Payables turnover | Purchases / AP | How many times payables are paid in a year |
| Quick ratio (Acid test, Liquidity ratio) | (Current assets – Inventory) / Current liabilities | Can readily available cash cover short term debts |
| Receivables turnover | Revenue / AR | How many times receivables are collected in a year |
| Return on assets (ROA or ROI) | PAT / Assets | Return 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/ Equity | Return to equity investors |
| Working capital turnover | Revenue / Working capital | Amount of sales generated by working capital |
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.