How to use it
- Take the balance sheet and the income statement for the same period.
- Enter the balance-sheet lines: current assets, of which inventory and cash, current liabilities, total assets, total liabilities and equity.
- Enter revenue, net income, EBIT and interest expense from the income statement.
- Read the ratios; net income, EBIT and equity may be negative.
Formulas
| Ratio | Formula |
|---|---|
| Current ratio | current assets ÷ current liabilities |
| Quick ratio | (current assets − inventory) ÷ current liabilities |
| Cash ratio | cash ÷ current liabilities |
| Debt-to-equity | total liabilities ÷ equity |
| Debt ratio | total liabilities ÷ total assets |
| Interest coverage | EBIT ÷ interest expense |
| Net profit margin | net income ÷ revenue × 100% |
| ROA | net income ÷ total assets × 100% |
| ROE | net income ÷ equity × 100% |
| Asset turnover | revenue ÷ total assets |
Worked example
Current assets 500,000 (inventory 150,000, cash 100,000), current liabilities 250,000, total assets 1,200,000, total liabilities 700,000, equity 500,000; revenue 1,500,000, net income 120,000, EBIT 200,000, interest 40,000.
- Current ratio 500,000 ÷ 250,000 = 2; quick ratio 350,000 ÷ 250,000 = 1.4; cash ratio 0.4.
- Debt-to-equity 700,000 ÷ 500,000 = 1.4; debt ratio 700,000 ÷ 1,200,000 = 0.58; interest coverage 200,000 ÷ 40,000 = 5.
- Net margin 120,000 ÷ 1,500,000 = 8 %; ROA 10 %; ROE 120,000 ÷ 500,000 = 24 %; asset turnover 1.25.
Tips
- Ratios are most useful compared over several years and with companies in the same industry.
- A high ROE can come from heavy borrowing: read it next to debt-to-equity.
- Check that assets equal liabilities plus equity; if they do not, a figure is probably from another date.