Written by: Matthew L
June 26 2024
Efficiency Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Inventory Turnover | Cost of Goods Sold / Average Inventory | Measures how many times a company’s inventory is sold and replaced over a period | Varies |
| Asset Turnover | Sales / Total Assets | Measures a firm’s efficiency at using its assets in generating sales or revenue | Varies |
Liquidity Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | Measures a company’s ability to pay short-term obligations | 1.5 – 2.0 |
| Quick Ratio | (Current Assets – Inventory) / Current Liabilities | Another liquidity ratio, but excludes inventory as it is less liquid | 1.0 – 1.5 |
Coverage Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Interest Coverage Ratio | EBIT / Interest Expenses | Measures how easily a company can pay interest expenses on its outstanding debt | > 1.5 |
Profitability Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Return on Assets (ROA) | Net Income / Total Assets | Measures how efficiently a company uses its assets to generate income | > 5% |
| Return on Equity (ROE) | Net Income / Shareholder’s Equity | Measures how efficiently a company uses its equity to generate income | > 15% |
| Gross Margin | Gross Profit / Revenue | Measures how much out of every dollar of sales a company actually keeps as gross profit | > 40% |
| Net Profit Margin | Net Income / Revenue | Measures how much out of every dollar of sales a company actually keeps in earnings | > 10% |
Dividend Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Dividend Payout Ratio | Dividends / Net Income | Measures what proportion of earnings are paid to shareholders as dividends | 30% – 70% |
| Dividend Yield | Annual Dividends per Share / Price per Share | Shows how much a company returns in dividends each year relative to its share price | 2% – 4% |
Leverage Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Debt to Equity Ratio | Total Debt / Total Equity | A leverage ratio that compares a company’s total debt with its total equity | < 2.0 |
Market Value Ratios
| Ratio | Formula | Explanation | Ideal Range |
|---|---|---|---|
| Earnings Per Share (EPS) | Net Income / Shares Outstanding | Measures the profit allocated to each share of common stock | Positive Value |
| Price to Earnings Ratio (P/E) | Stock Price / Earnings Per Share | Measures the price you pay for each dollar of earnings | 15 – 25 |
| Price to Sales (P/S) | Stock Price / Sales Per Share | Compares a company’s market value to its sales | < 3.0 |