# Financial Ratios  ## What are Financial Ratios?

Financial ratios are the indicators of the financial performance of companies and there are different types of financial ratios which indicate the company’s results, its financial risks and its working efficiency like the liquidity ratio, , Operating profitability ratios, Business risk ratios, financial risk ratio, Stability ratios etc.

### List of Top 28 Financial Ratios with Formulas & Types

Below are the types and list of financial ratios with Formulas

1. Current ratio
2. Quick ratio
3. Absolute liquidity ratio
4. Cash ratio
5. Receivables Turnover Ratio
6. Capital Turnover Ratio
7. Asset Turnover Ratio
8. Net Working Capital Ratio
9. Cash Conversion Cycle
10. Earnings Margin
11. Return on Investment
12. Return on Equity
13. Earnings Per Share
14. Operating Leverage
15. Financial leverage
16. Total Leverage
17. Debt-Equity Ratio
18. Interest Coverage Ratio
19. Debt Service Coverage Ratio
20. Fixed Asset Ratio
21. Current Asset to Fixed Asset
22. Proprietary Ratio
23. Fixed Interest Cover
24. Fixed Dividend Cover
25. Capacity Ratio
26. Activity Ratio
27. Efficiency Ratio

For eg:
Source: Financial Ratios (wallstreetmojo.com)

### Liquidity Ratio Analysis

The first type of financial ratio analysis is the Liquidy Ratio. The liquidity ratio aim is to determine the ability of a business to meet its financial obligations during the short-term and to maintain its short-term debt paying ability. Liquidity ratio can be calculated by multiple ways they are as follows:-

#### #1 – Current Ratio

The is referred to as a working capital ratio or banker’s ratio. The current ratio expresses the relationship of a current asset to current liabilities.

Formula = Current Assets / Current Liablities

A company’s current ratio can be compared with the past current ratio; this will help to determine if the current ratio is high or low at this period in time.

The ratio of 1 is considered to be ideal that is are twice a current liability, then no issue will be in repaying liability, and if the ratio is less than 2, repayment of liability will be difficult and work effects.

#### #2 – Acid Test Ratio/ Quick Ratio

The current ratio is generally used to evaluate an enterprise’s overall short-term or liquidity position, but many times it is desirable to know the more immediate position or instant debt paying ability of a firm than that indicated by the current ratio for this acid test financial ratio is used. It is relating the most to current liabilities.

Acid Test Formula = (Current Assets -Inventory)/(Current Liability)

The quick ratio can be written as:-

Quick Ratio Formula = Quick Assets / Current Liabilities

Or

Quick Ratio Formula = Quick Assets / Quick Liabilities

#### #3 – Absolute Liquidity Ratio

Absolute Liquidity helps to calculate actual liquidity, and for that, inventory and receivables are excluded from current assets. For a better view of liquidity, some assets are excluded that may not represent current cash flow. Ideally, the ratio should be 1:2.

Absolute Liquidity = Cash + + Net Receivable and Debtors

#### #4 – Cash Ratio

Cash Ratio Formula = Cash + Marketable Securities / Current Liability

If the ratio is high, then it reflects the underutilization of resources, and if the ratio is low, then it can lead to a problem in repayment of bills.

### Turnover Ratio Analysis

The second type of financial ratio analysis is the Turnover Ratio. The turnover ratio is also known as activity ratio. This type of ratio indicates the efficiency with which an enterprise’s resources are utilized. For each asset type, the financial ratio can be calculated separately.

The following are financial ratios commonly calculated:-

#### #5 – Inventory Turnover Ratio

This financial ratio measures the relative size of inventory and influences the amount of cash available to pay liabilities.

Inventory Turnover Ratio Formula = Cost of Goods Sold / Average Inventory

#### #6 – Debtors or Receivable Turnover Ratio

The receivable turnover ratio shows how many times the receivable was turned into cash during the period.

Receivable Turnover Ratio Formula = / Average Accounts Receivable

#### #7 – Capital Turnover Ratio

The ratio measures the effectiveness with which a firm uses its financial resources.

Capital Turnover Ratio Formula = Net Sales (Cost of Goods Sold) / Capital Employed

#### #8 – Asset Turnover Ratio

This financial ratio reveals the number of times the are turned over during a year. The higher the ratio better it is.

Asset Turnover Ratio Formula = Turnover / Net Tangible Assets

#### #9 – Net Working Capital Turnover Ratio

This financial ratio indicates whether or not working capital has been effectively utilized in making sales. signifies the excess of current assets over current liabilities.

Net Working Capital Turnover Ratio Formula = Net Sales / Net Working Capital

#### #10 – Cash Conversion Cycle

The  is the total time taken by the firm to convert its cash outflows into cash inflows (returns).

Cash Conversion Cycle Formula = Receivable Days + Inventory Days – Payable Days

### Operating Profitability Ratio Analysis

The third type of financial ratio analysis is the Operating Profitability Ratio. The profitability ratio helps to measure the profitability of a company through this efficiency of business activity. The following are the :-

#### #11 – Earning Margin

It is the ratio of net income to turnover express in percentage. It refers to the final net profit used.

Earning Margin formula = Net Income / Turnover * 100

#### #12 – Return on Capital Employed or Return On the Investment

This financial ratio measures profitability in relation to the total capital employed in a business enterprise.

Return on Investment formula = Profit Before Interest and Tax / Total Capital Employed

#### #13 – Return On Equity

is derived by taking net income and dividing it by shareholder’s equity; it provides a return that management is realizing from the shareholder’s equity.

Return on Equity Formula = Profit After Taxation – Preference Dividends / Ordinary Shareholder’s Fund * 100

#### #14 – Earnings Per Share

is derived by dividing the profit of the company by the total number of shares outstanding. It means profit or net earnings.

Earnings Per Share Formula = Earnings After Taxation – Preference Dividends / Number of Ordinary Shares

The investor uses all the above ratio before investing and make maximum profit and analyze risk. Through ratio, it is easy for him to compare and predict the future growth of a company. It also simplifies the .

The fourth type of financial ratio analysis is the Business Risk Ratios. Here we measure how sensitive is the company’s earnings with respect to its fixed costs as well as the assumed debt on the balance sheet.

#### #15 – Operating Leverage

is the percentage change in operating profit relative to sales, and it measures how sensitive the operating income is to the change in revenues. Greater the use of , the greater the impact of a change in sales on the operating income of a company.

Operating Leverage Formula = % change in EBIT / % change in Sales

#### #16 – Financial Leverage

Financial leverage is the percentage change in Net profit relative to Operating Profit, and it measures how sensitive the Net Income is to the change in Operating Income. Financial leverage primarily originates from the company’s financing decisions (usage of debt).

Financial Leverage formula = % change in Net Income / % change in EBIT

#### #17 – Total Leverage

Total leverage is the percentage change in Net profit relative to its Sales. Total leverage measures how sensitive the Net Income is to the change in Sales.

Total Leverage Formula = % change in Net Profit / % change in Sales

### Financial Risk Ratio Analysis

The fifth analysis is the Financial Risk Ratio. Here we measure how leveraged the company is and how it is placed with respect to its debt repayment capacity.

#### #18 – Debt Equity Ratio

Debt Equity Formula = Long Term Debts / Shareholder’s Fund

It helps to measures the extent of equity to repay debt. It is used for long-term calculation.

#### #19 – Interest Coverage Ratio Analysis

This financial ratio signifies the ability of the firm to pay interest on the assumed debt.

Interest Coverage Formula = EBITDA / Interest Expense

• Higher interest coverage ratios imply the greater ability of the firm to pay off its interests.
• If Interest coverage is less than 1, then EBITDA is not sufficient to pay off interest, which implies finding other ways to arrange funds.

#### #20 – Debt Service Coverage Ratio (DSCR)

tells us whether the Operating Income is sufficient to pay off all obligations that are related to debt in a year.

Debt Service Coverage Formula = Operating Income / Debt Service

Operating Income is nothing but EBIT

• A DSCR of less than 1.0 implies that the operating cash flows are not sufficient enough for Debt Servicing, implying negative cash flows.

### Stability Ratios

The sixth type of financial ratio analysis is the Stability Ratio. The stability ratio is used with a vision of the long-term. It uses to check whether the company is stable in the long run or not. This type of ratio analysis can be calculated by multiple ways they are as follows:-

#### #21 – Fixed Asset Ratio

This ratio is used to know whether the company is having sufficient fun or not to meet the long-term business requirement.

Fixed Asset Ratio Formula = Fixed Assets / Capital Employed

The ideal ratio is 0.67. If the ratio is less than 1 then it can be used to purchase fixed assets.

#### #22 – Ratio to Current Assets to Fixed Assets

Ratio to Current Assets to Fixed Assets = Current Assets / Fixed Assets

If ratio increases, profit increase and reflect business is expanding, whereas if ratio decreases means trading is loose.

#### #23 – Proprietary Ratio

The proprietary ratio is the ratio of shareholder funds upon total tangible assets; it tells about the financial strength of a company. Ideally, the ratio should be 1:3.

Proprietary Ratio Formula = Shareholder Fund / Total Tangible Assets

### Coverage Ratios

The seventh type of financial ratio analysis is the coverage Ratio. This type of is used to calculate dividend, which needs to be paid to investors or interest to be paid to the lender. The higher the cover, the better it is. It can be calculated by the below ways:-

#### #24 – Fixed Interest Cover

It is used to measure business profitability and its ability to repay the loan.

Fixed Interest Cover Formula = Net Profit Before Interest and Tax / Interest Charge

#### #25 – Fixed Dividend Cover

It helps to measure dividend need to pay to the investor.

Fixed Dividend Cover Formula = Net Profit Before Interest and Tax / Dividend on Preference Share

### Control Ratio Analysis

The eighth type of financial ratio analysis is the Control Ratio. Control ratio from the name itself, it is clear that its use to control things by management. This type of ratio analysis helps management to check favorable or unfavorable performance.

#### #26 – Capacity Ratio

For this type of ratio analysis, the formula given below will be used for the same.

Capacity Ratio Formula = Actual Hour Worked / Budgeted Hour * 100

#### #27 –  Activity Ratio

To calculate a measure of activity below, the formula is used.

Activity Ratio Formula = Standard Hours for Actual Production / Budgeted Standard Hour * 100

#### #28 – Efficiency Ratio

To calculate productivity below formula is used.

Efficiency Ratio Formula = Standard Hours for Actual Production / Actual Hour Worked * 100

If a percentage is 100 or more, it is considered to be as favorable; if a percentage is less than 100%, then it is unfavorable.

### Recommended Articles

This has been a guide to Financial Ratio Analysis. Here we provide a comprehensive list of 28 financial ratios formulas, types, and interpretation. You may learn more about ratio analysis from the following articles –

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