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.)
FINITIONS
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 FINANCIAL RATIOS CALCULATOR
Use this worksheet to calculate your financial ratios from period to period.
This Ratio Calculator will help you track financial trends in your business.
To use, just insert the requested values and the Ratios will be automatically calculated for you.

Note: Calculations may not work properly if both numbers are negative. Numbers that appear in ( ) are negative.

Profitability Ratios
Gross Profit
Gross profit margin Gross Profit
45.00
Sales

Operating Income
Operating profit margin Operating Income
17.00
Sales

Net Income
Net profit margin Net Income
12.50
Sales

Liquidity Ratios
Current Assets
Current ratio Current Assets
115.00
Current Liabilities

Cash & Near Cash

Quick ratio Current Assets - Inventory
85.00
Liabilities

Operating Ratios
Cost of Goods Sold
Inventory turnover ratio Cost of Goods Sold
45.00
Inventory

Net Sales
Sales to receivables ratio Net Sales
95.00
Net Receivables

Profit Before Int. & Tx

Times interest earned Profit Before Interest and Taxes
19.00
Total Interest Charges

Net Income Before Tx

Return on assets Net Income Before Taxes
17.00
Total Interest Charges
 Net Income
Return on equity Net Income
12.50
Net Worth at Beginning of Period

Solvency Ratios
Total Liabilities
Debt to worth ratio Total Liabilities
125.00
Net Worth

Current Assets
Working capital Current Assets - Current Liabilities 115.00
CULATOR

Sales
45.00%
100.00

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17.00%
100.00

Sales
12.50%
100.00

Current Liabilities
2.56
45.00

Liabilities
0.68
125.00

Inventory
1.50
30.00

Net Receivables
6.33
15.00

Interest Charges
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2.00

Interest Charges
8.50
2.00
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45.00

Net Worth
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Current Liabilities
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45.00

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 FINANCIAL RATIOS EVOLUTION CALCULATOR
Use this worksheet to calculate your financial ratios from period to period.
This Ratio Calculator will help you track financial trends in your business.
To use, follow the formulas provided.
Note: Calculations may not work properly if both numbers are negative.

Period 1 Period 2
Profitability Ratios

Gross profit margin Gross Profit

Sales

Operating profit margin Operating Income

Sales

Net profit margin Net Income

Sales

Liquidity Ratios

Current ratio Current Assets

Current Liabilities

Quick ratio Current Assets - Inventory

Liabilities

Operating Ratios

Inventory turnover ratio Cost of Goods Sold

Inventory

Sales to receivables ratio Net Sales

Net Receivables

Times interest earned Profit Before Interest and Taxes

Total Interest Charges

Return on assets Net Income Before Taxes

Total Interest Charges

Return on equity Net Income

Net Worth at Beginning of Period

Solvency Ratios

Debt to worth ratio Total Liabilities

 Net Worth

Working capital Current Assets - Current Liabilities

ULATOR

Difference

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