Formulas FT

Financial Ratios Formulae
Financial Ratios
Profitability Leverage Liquidity Efficiency Valuation

Ratios Ratios Ratios Ratios Ratios
•Gross Profit •Debt to Equity •Current Ratio •Stock Turnover •Price-Earnings
Margin Ratio Ratio Multiple
•Operating Profit •Quick Ratio •Receivables'
Margin •Debt to Assets Turnover Ratio •Market to Book
•Net Profit Margin Ratio •Fixed Assets' Value Ratio
•Return on Equity Turnover Ratio
•Return on Assets •Interest Coverage •Total Assets'
•Return on Capital Ratio Turnover Ratio
Employed •Payables'
•Earning Power •Debt Service Turnover Ratio
Coverage Ratio
I. Liquidity Ratios
1. Current Ratio = Current Assets

Current Liabilities
2. Quick Ratio = Current Assets - Inventory

Current Liabilities
II. Leverage Ratios
1. Debt to Equity Ratio = Long-term Borrowing + Short-term Borrowing

Paid-up Share Capital + Reserves & Surplus
2. Debt to Assets Ratio = Total Liabilities

Total Assets
3. Interest Coverage Ratio = Profit before Interest and Tax

Interest Expense
OR
Profit before Depreciation, Interest and Taxes

Interest Expense
4. Debt Service Coverage Ratio = Cashflow before Interest & Taxes
Interest + Repayment of Debt + Lease Rentals
III. Profitability Ratios
1. Gross Profit Margin = Gross Profit X 100

Net Sales
2. Operating Profit Margin = Operating Profit X 100

Net Sales
3. Net Profit Margin = Net Profit X 100

Total Income (Net Sales + NOI)
4. Return on Equity = Net Profit – Preference Dividend (if any) X 100

Average Equity
5. Return on Assets = Net Profit X 100

Average Total Assets
6. Return on Capital Employed = Profit before Interest and Tax (1- T) X 100
Average Total Capital Employed
7. Earning Power = Profit before Interest and Tax X 100

IV. Turnover / Efficiency / Activity Ratios
1. Inventory Turnover = Cost of Goods Sold

Average Inventory
OR
Net Sales
Average Inventory
2. Stock Conversion Period (in days) = 365 X Average Inventory

Cost of Goods Sold
3. Receivables’ Turnover Ratio = Net Credit Sales

Average Trade Receivables
4. Average Collection Period (in days) = 365 X Average Trade Receivables

Net Credit Sales
5. Fixed Assets’ Turnover = Net Sales

Average Net Fixed Assets
6. Total Assets’ Turnover = Total Income

7. Payables’ Turnover Ratio = Net Credit Purchase

Average Trade Payables
8. Average Payment Period (in days) = 365 X Average Trade Payables

Net Credit Purchase
V. Valuation Ratios
1. Yield (Holding Period less than 1 year)= D + (P1 – P0)

P0
2. Price-Earnings Multiple = Market Price per share

Earnings per share
Where; Earnings per share = Net Profit – Preference Dividend (if any)
No. of paid-up equity shares
3. Market Value to Book Value Ratio = Market Price per share

Book value per share
Book Value per share = Paid-up equity share capital + Reserves & Surplus
No. of paid-up equity shares
1. Profit Margins: They compare the net income to sales and measure the ability of
a co. to generate profit from its sales. A higher ratio indicates a greater ability to
generate profits from sales.
2. Return on Equity: It compares net income to the average balance in shareholders’

equity during a year. It indicates how effectively a co. uses the equity provided by
shareholders to generate additional equity for its owners. Shareholders would
want this ratio as high as possible.
3. Return on Assets: It compares the net income to average total assets and measures
the ability of a co. to generate profit from its entire resource base and not just
provided by owners.
4. Earnings per share: It represents the return on each share owned by an investor.
5. Price-Earnings Ratio: It compares the net income to the current market price of a
company’s share. It indicates the confidence of the investors in the future growth
prospects of a company. Generally, a higher PE Multiple shows that investors are
optimistic about the performance of the company.
6. Current Ratio: It compares assets that can be turned into cash within one year to
the liabilities which have to be paid within one year. Neither a very high current
ratio nor a very low ratio is desirable. A large current ratio is not a satisfactory
measure of liquidity when inventories constitute a major part of current assets. A
company should maintain just the adequate amount of current assets and should
focus towards more productive investments.
7. Quick Ratio /Acid-test Ratio: It compares a company’s cash and near-cash assets
to the liabilities which have to be paid within one year. Since inventory is a sticky
asset, it is excluded from current assets to arrive at quick assets.
8. Receivables’ Turnover Ratio: It measures a company’s ability to make and collect

sales.
9. Inventory Turnover Ratio: It reveals how many times in a period the company is
able to sell its inventory balance.
10. Financial Leverage: It is the degree to which a company obtains capital through
debt rather than equity in an attempt to increase returns to shareholders.
11. Capital Structure: It refers to the manner in which a company has financed its
assets- either through debt or equity. Therefore, it is an indication of how much
financial leverage a company is using.
12. Debt to Assets Ratio: It is measures the percentage of assets financed through
borrowed funds.
13. Debt to Equity Ratio: It measures a company’s capital structure and financial
leverage. A higher debt to equity ratio indicates a highly leveraged, riskier capital
structure and therefore a greater risk of insolvency.
14. Interest Coverage Ratio/Times Interest Earned Ratio: It measures the capacity of
a company to pay interest out of current earnings.
15. Debt Service Coverage Ratio: It is a measure of the cash flow available to pay
current debt obligations. Debt obligations due within one year may include
interest payment, principal repayment and lease payments.

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Financial Ratios Formulae

Profitability Leverage Liquidity Efficiency Valuation

1. Current Ratio = Current Assets

2. Quick Ratio = Current Assets - Inventory

II. Leverage Ratios

1. Debt to Equity Ratio = Long-term Borrowing + Short-term Borrowing

2. Debt to Assets Ratio = Total Liabilities

3. Interest Coverage Ratio = Profit before Interest and Tax

Profit before Depreciation, Interest and Taxes

4. Debt Service Coverage Ratio = Cashflow before Interest & Taxes

Interest + Repayment of Debt + Lease Rentals

III. Profitability Ratios

1. Gross Profit Margin = Gross Profit X 100

2. Operating Profit Margin = Operating Profit X 100

3. Net Profit Margin = Net Profit X 100

4. Return on Equity = Net Profit – Preference Dividend (if any) X 100

5. Return on Assets = Net Profit X 100

7. Earning Power = Profit before Interest and Tax X 100

IV. Turnover / Efficiency / Activity Ratios

1. Inventory Turnover = Cost of Goods Sold

2. Stock Conversion Period (in days) = 365 X Average Inventory

3. Receivables’ Turnover Ratio = Net Credit Sales

4. Average Collection Period (in days) = 365 X Average Trade Receivables

5. Fixed Assets’ Turnover = Net Sales

6. Total Assets’ Turnover = Total Income

7. Payables’ Turnover Ratio = Net Credit Purchase

8. Average Payment Period (in days) = 365 X Average Trade Payables

1. Yield (Holding Period less than 1 year)= D + (P1 – P0)

2. Price-Earnings Multiple = Market Price per share

3. Market Value to Book Value Ratio = Market Price per share

2. Return on Equity: It compares net income to the average balance in shareholders’

8. Receivables’ Turnover Ratio: It measures a company’s ability to make and collect

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