Ratios Formulas

Liquidity Ratio
Liquidity position of the company helps to assess the short term financial health of a company. Liquidity
is closely related to cash flows and its short term assets.
1. Current Ratio = Current Assets ÷ Current Liabilities

Evaluates the ability of a company to pay short-term obligations using current assets (cash,
marketable securities, current receivables, inventory, and prepayments).
2. Acid Test Ratio = Quick Assets ÷ Current Liabilities

Also known as "quick ratio", it measures the ability of a company to pay short-term
obligations using the more liquid types of current assets or "quick assets" (cash, marketable
securities, and current receivables).
3. Cash Ratio = (Cash + Marketable Securities) ÷ Current Liabilities

Measures the ability of a company to pay its current liabilities using cash and marketable
securities. Marketable securities are short-term debt instruments that are as good as cash.
Profitability ratios
Profit is the surplus income in raw form it is the total revenue minus total costs. It is mostly concentrated
from the information of income statement or profit and loss account.
1. Gross Profit Rate = Gross Profit ÷ Net Sales

Evaluates how much gross profit is generated from sales. Gross profit is equal to net sales
(sales minus sales returns, discounts, and allowances) minus cost of sales.
2. Return on Sales = Net Income ÷ Net Sales

Also known as "net profit margin" or "net profit rate", it measures the percentage of income
derived from dollar sales. Generally, the higher the ROS the better.
3. Operating profit margin ratio = Operating profit ÷ Net Sales

The operating profit margin ratio indicates how much profit a company makes after paying for variable
costs of production such as wages, raw materials, etc.
4. Return on Assets = Net Income ÷ Total Assets

In financial analysis, it is the measure of the return on investment. ROA is used in evaluating
management's efficiency in using assets to generate income.
5. Return on Stockholders' Equity = Net Income ÷ Stockholders' Equity

Measures the percentage of income derived for every dollar of owners' equity
6. Return on capital employed =Earing before interest and tax ÷ (Total assets –current liabilities)
Return on Capital Employed (ROCE), a profitability ratio, measures how efficiently a company is using
its capital to generate profits
7. Asset Turnover Ratio= Net sales ÷ Total Assets

The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales.
Gearing ratios
These ratios tells about the financial mix of company
1. Debt-Equity Ratio = Total Liabilities ÷ Total Equity

Evaluates the capital structure of a company. A D/E ratio of more than 1 implies that the
company is a leveraged firm; less than 1 implies that it is a conservative one.
2. Debt Ratio = Total Liabilities ÷ Total Assets

Measures the portion of company assets that is financed by debt (obligations to third
parties). Debt ratio can also be computed using the formula: 1 minus Equity Ratio.
Coverage ratios
These ratios that tells us about the ability of the company to pay the recourse provider.
1. Interest coverage ratio/Times Interest Earned = EBIT ÷ Interest Expense

Measures the number of times interest expense is converted to income, and if the company
can pay its interest expense using the profits generated. EBIT is earnings before interest and
taxes.
2. Dividend coverage ratio= Earning after tax ÷ Dividend

Measures the number of times Dividend is converted to income, and if the company
can pay its dividend using the profits generated
Efficiency/ activity ratios
Activity ratios help to assess the level of productivity in business cycle of an enterprise.
1. Inventory Turnover = Cost of Sales ÷ Average Inventory

Represents the number of times inventory is sold and replaced. Take note that some
authors use Sales in lieu of Cost of Sales in the above formula. A high ratio indicates that the
company is efficient in managing its inventories.
2. Days Inventory Outstanding = 360 Days ÷ Inventory Turnover

Also known as "inventory turnover in days". It represents the number of days inventory sits
in the warehouse. In other words, it measures the number of days from purchase of
inventory to the sale of the same. Like DSO, the shorter the DIO the better.
3. Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable

Measures the efficiency of extending credit and collecting the same. It indicates the average
number of times in a year a company collects its open accounts. A high ratio implies efficient
credit and collection process.
4. Days Sales Outstanding = 360 Days ÷ Receivable Turnover

Also known as "receivable turnover in days", "collection period". It measures the average
number of days it takes a company to collect a receivable. The shorter the DSO, the better.
Take note that some use 365 days instead of 360.
5. Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable

Represents the number of times a company pays its accounts payable during a period. A low
ratio is favored because it is better to delay payments as much as possible so that the
money can be used for more productive purposes.
6. Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover

Also known as "accounts payable turnover in days", "payment period". It measures the
average number of days spent before paying obligations to suppliers. Unlike DSO and DIO,
the longer the DPO the better (as explained above).
7. Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding

Measures the number of days a company makes 1 complete operating cycle, i.e. purchase
merchandise, sell them, and collect the amount due. A shorter operating cycle means that
the company generates sales and collects cash faster.
8. Cash Conversion Cycle = Operating Cycle - Days Payable Outstanding

CCC measures how fast a company converts cash into more cash. It represents the number
of days a company pays for purchases, sells them, and collects the amount due. Generally,
like operating cycle, the shorter the CCC the better.
Valuation ratios
Valuation ratio shows the relationship between the market value of a company or its equity and some
fundamental financial
1. Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share

Used to evaluate if a stock is over- or underpriced. A relatively low P/E ratio could indicate
that the company is underpriced. Conversely, investors expect high growth rate from
companies with high P/E ratio.
2. Price-to-Sales= Market Price per Share ÷ Sales per Share

Price to sales ratio (PSR ratio) indicates how much investor paid for a share compared to the sales a
company generated per share.
3. Dividend Pay-out Ratio = Dividend per Share ÷ Earnings per Share

Determines the portion of net income that is distributed to owners. Not all income is
distributed since a significant portion is retained for the next year's operations.
4. Dividend Yield Ratio = Dividend per Share ÷ Market Price per Share
Measures the percentage of return through dividends when compared to the price paid for
the stock. A high yield is attractive to investors who are after dividends rather than longterm capital
appreciation.
5. Book Value per Share = Common SHE ÷ Average Common Shares

Indicates the value of stock based on historical cost. The value of common shareholders'
equity in the books of the company is divided by the average common shares outstanding.

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Liquidity Ratio

1. Current Ratio = Current Assets ÷ Current Liabilities

2. Acid Test Ratio = Quick Assets ÷ Current Liabilities

3. Cash Ratio = (Cash + Marketable Securities) ÷ Current Liabilities

1. Gross Profit Rate = Gross Profit ÷ Net Sales

2. Return on Sales = Net Income ÷ Net Sales

3. Operating profit margin ratio = Operating profit ÷ Net Sales

4. Return on Assets = Net Income ÷ Total Assets

5. Return on Stockholders' Equity = Net Income ÷ Stockholders' Equity

7. Asset Turnover Ratio= Net sales ÷ Total Assets

These ratios tells about the financial mix of company

1. Debt-Equity Ratio = Total Liabilities ÷ Total Equity

2. Debt Ratio = Total Liabilities ÷ Total Assets

1. Interest coverage ratio/Times Interest Earned = EBIT ÷ Interest Expense

2. Dividend coverage ratio= Earning after tax ÷ Dividend

Efficiency/ activity ratios

1. Inventory Turnover = Cost of Sales ÷ Average Inventory

2. Days Inventory Outstanding = 360 Days ÷ Inventory Turnover

3. Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable

4. Days Sales Outstanding = 360 Days ÷ Receivable Turnover

5. Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable

6. Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover

7. Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding

8. Cash Conversion Cycle = Operating Cycle - Days Payable Outstanding

1. Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share

2. Price-to-Sales= Market Price per Share ÷ Sales per Share

3. Dividend Pay-out Ratio = Dividend per Share ÷ Earnings per Share

5. Book Value per Share = Common SHE ÷ Average Common Shares

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