Financial Ratios - Complete List and Guide To All Financial Ratios

What are Financial Ratios?
Financial ratios are created with the use of numerical values taken from nancial statements
to gain meaningful information about a company. The numbers found on a company’s
nancial statements – balance sheet, income statement, and cash ow statement are used
to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins,
pro tability, rates of return, valuation, and more.
Financial ratios are grouped into the following categories:
Liquidity ratios
Leverage ratios
E ciency ratios
Pro tability ratios
Market value ratios
Uses and Users of Financial Ratio Analysis 

Analysis of nancial ratios serves two main purposes:

1. Track company performance:

Determining individual nancial ratios per period and tracking the change in their values
over time is done to spot trends that may be developing in a company. For example, an
increasing debt-to-asset ratio may indicate that a company is overburdened with debt and
may eventually be facing default risk.
2. Make comparative judgments regarding company performance

Comparing nancial ratios with that of major competitors is done to identify whether the
company is performing better or worse than the industry average. For example, comparing
the return on assets between companies helps an analyst or investor to determine which
company’s assets are being used most e ciently.
Users of nancial ratios include parties external and internal to the company:
External users: Financial analysts, retail investors, creditors, competitors, tax

authorities, regulatory authorities, and industry observers
Internal users: Management team, employees, and owners
Liquidity Ratios
Liquidity ratios are nancial ratios that measure a company’s ability to repay both short- and
long-term obligations. Common liquidity ratios include the following:
The current ratio measures a company’s ability to pay o short-term liabilities with current
assets:
Current ratio = Current assets / Current liabilities
The acid-test ratio measures a company’s ability to pay o short-term liabilities with quick
assets:
Acid-test ratio = Current assets – Inventories / Current liabilities
The cash ratio measures a company’s ability to pay o short-term liabilities with cash and
cash equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities
The operating cash ow ratio is a measure of the number of times a company can pay o
current liabilities with the cash generated in a given period:
Operating cash ow ratio = Operating cash ow / Current liabilities
Leverage Financial Ratios

Leverage ratios measure the amount of capital that comes from debt. In other words,
leverage nancial ratios are used to evaluate a company’s debt levels. Common leverage
ratios include the following:
The debt ratio measures the relative amount of a company’s assets that are provided from
debt:
Debt ratio = Total liabilities / Total assets
The debt to equity ratio calculates the weight of total debt and nancial liabilities against
shareholders equity:
Debt to equity ratio = Total liabilities / Shareholder’s equity
The interest coverage ratio determines how easily a company can pay its interest expenses:
Interest coverage ratio = Operating income / Interest expenses
The debt service coverage ratio determines how easily a company can pay its debt
obligations:
Debt service coverage ratio = Operating income / Total debt service
E ciency Ratios
E ciency ratios, also known as activity nancial ratios, are used to measure how well a
company is utilizing its assets and resources. Common e ciency ratios include:
The asset turnover ratio measures a company’s ability to generate sales from assets:

Asset turnover ratio = Net sales / Total assets

The inventory turnover ratio measures how many times a company’s inventory is sold and
replaced over a given period:
Inventory turnover ratio = Cost of goods sold / Average inventory
The accounts receivable turnover ratio measures how many times a company can turn
receivables into cash over a given period:
Receivables turnover ratio = Net credit sales / Average accounts receivable
The days sales in inventory ratio measures the average number of days that a company
holds onto its inventory before selling it to customers:
Days sales in inventory ratio = 365 days / Inventory turnover ratio
Pro tability Ratios

Pro tability ratios measure a company’s ability to generate income relative to revenue,
balance sheet assets, operating costs, and equity. Common pro tability nancial ratios
include the following:
The gross margin ratio compares the gross pro t of a company to its net sales to show how
much pro t a company makes after paying o its cost of goods sold:
Gross margin ratio = Gross pro t / Net sales
The operating margin ratio compares the operating income of a company to its net sales to
determine operating e ciency:
Operating margin ratio = Operating income / Net sales
The return on assets ratio measures how e ciently a company is using its assets to
generate pro t:
Return on assets ratio = Net income / Total assets


The return on equity ratio measures how e ciently a company is using its equity to
generate pro t:
Return on equity ratio = Net income / Shareholder’s equity
Market Value Ratios

Market value ratios are used to evaluate the share price of a company’s stock. Common
market value ratios include the following:
The book value per share ratio calculates the per share value of a company based on equity
available to shareholders:
Book value per share ratio = Shareholder’s equity / Total shares outstanding
The dividend yield ratio measures the amount of dividends attributed to shareholders
relative to the market value per share:
Dividend yield ratio = Dividend per share / Share price
The earnings per share ratio measures the amount of net income earned for each share
outstanding:
Earnings per share ratio = Net earnings / Total shares outstanding
The price-earnings ratio compares a company’s share price to the earnings per share:
Price-earnings ratio = Share price / Earnings per share
Related Readings
Thank you for reading CFI’s guide to nancial ratios. CFI is the o cial global provider of the
Financial Modeling & Valuation Analyst (FMVA)™ certi cation program for investment
banking professionals. To help you advance your career in the nancial services industry,
check out the following additional resources:
Analysis of Financial Statements

How the 3 Financial Statements are Linked 
Comparable Company Analysis
Types of Financial Models
Financial Analyst Training
Get world-class nancial training with CFI’s online certi ed nancial analyst training
program!
Gain the con dence you need to move up the ladder in a high powered corporate nance
career path.
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What are Financial Ratios?

Financial ratios are grouped into the following categories:

Uses and Users of Financial Ratio Analysis 

1. Track company performance:

2. Make comparative judgments regarding company performance

External users: Financial analysts, retail investors, creditors, competitors, tax

Current ratio = Current assets / Current liabilities

Acid-test ratio = Current assets – Inventories / Current liabilities

Operating cash ow ratio = Operating cash ow / Current liabilities

Leverage Financial Ratios

Debt ratio = Total liabilities / Total assets

Debt to equity ratio = Total liabilities / Shareholder’s equity

Interest coverage ratio = Operating income / Interest expenses

Debt service coverage ratio = Operating income / Total debt service

Inventory turnover ratio = Cost of goods sold / Average inventory

Receivables turnover ratio = Net credit sales / Average accounts receivable

Days sales in inventory ratio = 365 days / Inventory turnover ratio

Pro tability Ratios

Gross margin ratio = Gross pro t / Net sales

Operating margin ratio = Operating income / Net sales

Return on assets ratio = Net income / Total assets

Return on equity ratio = Net income / Shareholder’s equity

Market Value Ratios

Dividend yield ratio = Dividend per share / Share price

Earnings per share ratio = Net earnings / Total shares outstanding

Price-earnings ratio = Share price / Earnings per share

Analysis of Financial Statements

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