RATIO FORMULA SHEET
PROFITABILITY / MARGIN RATIOS
Note that with regards to the considered margin ratios, we always divide by sales.
Margin ratios also inform you about key cost blocks of a firm.
à “How much … can be generated from every currency unit of revenues earned?”
1. Gross (Profit) Margin
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠
How much gross profit is used up by COGS?
How much gross profit can be generated from every currency unit of revenues
earned?
2. EBITDA Margin
𝐸𝐵𝐼𝑇𝐷𝐴
𝑆𝑎𝑙𝑒𝑠
Approximately: How much cash can be generated from every currency unit of
revenues earned?
3. EBIT / Operating Margin
𝐸𝐵𝐼𝑇
𝑆𝑎𝑙𝑒𝑠
How much operating profit can be generated from every currency unit of revenues
earned?
4. (Net) Profit Margin
𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠
What is the net income that can be generated from every currency unit of revenues
earned?
5. Selling Expense Margin
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
𝑆𝑎𝑙𝑒𝑠
How much net margin is lost due to selling expenses?
1
EFFICIENCY RATIOS
Keep in mind that turnover ratios also inform you about the asset structure of a firm.
à “How efficiently does a firm use its ... to generate …?”
1. (Total) Asset Turnover
𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
How efficiently does a firm use its total assets to generate revenues?
2. PP&E Turnover
𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑙𝑎𝑛𝑡, 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡
How efficiently does a firm use its PP&E to generate revenues?
3. Net Working Capital Turnover
𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
How efficiently does a firm use its working capital to generate revenues?
4. Inventory Turnover
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
How efficiently turns a firm use its inventory into revenues?
5. Non-Current Asset Turnover
𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑜𝑛𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
How efficiently does a firm use its non-current assets to generate revenues?
6. Average Days to Sell Inventory
365
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
How long does it take a firm to clear its inventory stock?
2
7. Average Days to Collect Receivables
365
𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
How long does it take a firm to collect its receivables?
CAPITAL STRUCTURE AND LIQUIDITY RATIOS
1. Leverage
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦
How much equity does a firm employ in order to finance its total assets?
2. Debt-to-Equity
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦
What is the relation of a firm’s debt to equity financing?
3. Debt-to-Assets
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
How much debt does a firm employ to finance its assets?
4. Operating Cash Flow to Total Debt
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
By how much would current operating cash flow reduce debt if it would solely be
spent on repaying debt?
5. Current Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
How well do current assets cover current liabilities?
3
6. Quick Ratio
𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
How well do assets with relatively high liquidity cover current liabilities?
7. EBIT Interest Coverage
𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
How well does operating income cover interest expenses?
PERFORMANCE RATIOS
à “How effectively is the management using the firm’s … to generate profits?”
1. Return on Equity (RoE)
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 O 𝐸𝑞𝑢𝑖𝑡𝑦
How effectively is the management using the firm’s equity to generate profits?
1. EBIT Interest Coverage
𝐸𝐵𝐼𝑇 (𝑜𝑟 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
How effectively is the management using the firm’s assets to generate profits?
BASIC DU PONT MODEL
A DuPont analysis is used to evaluate the component parts of a company's return on equity
(ROE). This allows an investor to determine what financial activities are contributing the
most to the changes in ROE.
𝑅𝑜𝐸 =
𝑅𝑜𝐸 =
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 O 𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
×
×
𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦
𝑅𝑜𝐸 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒
4
5