Financial Ratios and Metrics for Business Analysis

Working Capital = Current Assets − Current Liabilities

Dollar cushion of assets over liabilities; shows short-term safety (positive safer, negative risky).

Current Ratio = Current Assets ÷ Current Liabilities

Ability to cover short-term debts with short-term assets; >1.0 safe, <1.0 risky, too high may mean inefficiency.

Quick (Acid-Test) Ratio = (Cash + Marketable Securities + A/R) ÷ Current Liabilities

Strict liquidity test excluding inventory; benchmark ≥1.0; conservative measure of solvency.

Gross Margin % = Gross Margin ÷ Sales

% of sales left after covering COGS; shows production efficiency and pricing power.

Net Margin % = Net Income ÷ Sales

% of sales turned into profit; bottom-line profitability.

Return on Assets (ROA) = (Net Income + [Interest Expense × (1 − tax rate)]) ÷ Avg. Total Assets

Profitability relative to all assets; shows efficiency of using assets.

Return on Equity (ROE) = Net Income ÷ Avg. Stockholders' Equity

Profit return on shareholders' investment; key investor metric.

Earnings per Share (EPS) = Net Income ÷ Avg. # of Common Shares

Profit earned per share; critical for valuation.

Dividend Payout Ratio = Dividends per Share ÷ EPS

% of earnings paid to shareholders; high ratio = income focus, low ratio = growth focus.

Dividend Yield = Dividends per Share ÷ Market Price per Share

Cash return relative to stock price; compares income-generating potential.

Price/Earnings (P/E) Ratio = Market Price per Share ÷ EPS

Shows how much investors pay for $1 of earnings; high P/E = growth expectations, low = undervaluation/risk.

Book Value per Share = Total Stockholders' Equity ÷ Ending # Shares

Theoretical liquidation value per share; compare to market price to see under/overvaluation.

Accounts Receivable Turnover = Sales on Account ÷ Avg. Accounts Receivable

Times receivables collected per year; higher = faster collection, better cash flow.

Average Collection Period = 365 ÷ A/R Turnover

Average days to collect receivables; lower = quicker cash inflows.

Inventory Turnover = COGS ÷ Avg. Inventory

Times inventory sold/replaced annually; higher = efficient, lower = slow-moving stock.

Average Sale Period = 365 ÷ Inventory Turnover

Average days inventory sits before sale; lower = more efficient.

Operating Cycle = Average Sale Period + Average Collection Period

Time from buying inventory to collecting cash; shorter = better liquidity.

Total Asset Turnover = Sales ÷ Avg. Total Assets

Efficiency of assets in generating sales; higher = more productive use of assets.

Debt-to-Equity Ratio = Total Liabilities ÷ Stockholders' Equity

Balance of debt vs. equity financing; high = greater risk but potential for hi