Financial Ratios: Formulas, Types and Examples

What financial ratios tell you

Financial ratios compare defined financial-statement amounts to answer a specific question. Liquidity asks about near-term resources and obligations; profitability relates a profit subtotal to sales; leverage describes financing; efficiency and returns connect period activity with assets or equity. A single ratio is not a business-health score. Open the Financial Ratios Calculator to calculate the grouped measures with your own records.

Choose the question before the formula

One connected fictional business

Cedar Supply’s original annual example uses the same inputs as the calculator defaults. It reports $200,000 net revenue, $120,000 COGS, $50,000 operating expenses including $10,000 D&A, $5,000 interest and $5,000 income-tax expense. Thus gross profit is $80,000, operating profit/EBIT $30,000, net income $20,000 and EBITDA $40,000. Net credit sales are $180,000, and the reporting period is 365 days. All amounts are fictional USD, not an industry benchmark.

Closing current assets are $60,000: $10,000 cash including equivalents, $5,000 separate eligible liquid investments, $25,000 trade receivables, $18,000 inventory and $2,000 prepayments. Current liabilities are $30,000. Closing assets $200,000 equal liabilities $120,000 plus equity $80,000; defined interest-bearing debt is $60,000. Opening inventory, receivables, assets and equity are $22,000, $20,000, $180,000 and $70,000 respectively. Follow the full statement and cash reconciliation without duplicating that walkthrough here.

Printable financial-ratio formula reference

Print this page for the in-page reference; there is no separate eBook download. “×” means times. Ratios below use closing balances for liquidity/leverage and period flows with the stated average balances for efficiency/returns. Cash already includes equivalents; do not add them again.

Match dates, denominators and accounting scope

A balance sheet is a snapshot; an income statement covers an interval. For inventory turnover, average inventory is ($22,000 + $18,000) / 2 = $20,000. For ROA it is ($180,000 + $200,000) / 2 = $190,000. More frequent observations may better capture seasonality. Do not compare a 90-day return with a 365-day return and call the difference an improvement without addressing the period.

Zero sales or zero interest does not make the corresponding margin or coverage zero; the division is undefined. Missing values are unknown, not zero. Zero or negative equity makes conventional positive-equity leverage and return comparisons unsuitable. The calculator flags these boundaries rather than inventing a score.

Different leverage formulas legitimately give different numbers

Assets/equity = 2.50×, total liabilities/equity = 1.50×, and interest-bearing debt/equity = 0.75×. With positive equity and a balanced statement, assets/equity equals 1 + liabilities/equity. It does not automatically equal 1 + interest-bearing debt/equity. Use the integrated leverage selector to keep the numerators distinct. These business ratios are not trading leverage or bank regulatory-capital measures.

Interpret a pattern, not a universal pass mark

A current ratio can rise because more overdue invoices accumulate; a gross margin can improve while collections slow; a larger equity multiplier can lift ROE without stronger operating profit. Look at customer aging, stock quality, debt maturities and operating cash alongside the ratio. Compare the same entity, accounting policy, season and period against its own history and truly comparable businesses. No universal green threshold establishes credit eligibility.

Trace EBITDA to the included expenses before interpreting its margin. COGS classification affects both gross margin and inventory turnover; operating cash flow explains why profit is not the money available to pay obligations.

Common mistakes and next steps

Double-counting cash, mixing total sales with credit sales, using closing inventory where an average is intended, hiding negative equity and calling working capital a percentage all change the measure. Record the numerator, denominator, dates and missing data before comparing results. Analyze the complete Cedar Supply statements or enter a matched dataset in the calculator.

Sources and editorial scope

The SEC’s statement guide explains the statement boundaries. BDC’s financial tools provide a practical ratio reference. Our dataset, formula table and reconciliations are original and use the definitions printed here. Published by MyBreakeven under our editorial and correction standards.