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Complete guide to all financial ratios used in stock analysis
Financial ratios distil complex balance sheets and income statements into comparable numbers. They fall into four logical groups: profitability (how much does the business earn?), liquidity (can it pay its bills?), solvency (can it survive long term?), and efficiency (how well does it use its resources?). Knowing which ratio addresses which question prevents you from applying the wrong metric to the wrong problem.
A ratio in isolation tells you little. Context comes from three sources: historical trend for the same company, sector peer comparison, and absolute threshold benchmarks. Use all three before drawing conclusions.
Profitability ratios answer the most fundamental question: is this business earning decent returns for its owners?
| Ratio | Formula | What It Tells You | Healthy Benchmark |
|---|---|---|---|
| Gross Profit Margin | (Revenue − COGS) ÷ Revenue | Pricing power and production efficiency | Varies widely; higher is better |
| EBITDA Margin | EBITDA ÷ Revenue | Operating profitability before finance and accounting | > 15% for most sectors |
| Net Profit Margin | Net Profit ÷ Revenue | Bottom-line profitability after everything | > 10% desirable; > 20% excellent |
| ROE | Net Profit ÷ Equity | Return on shareholder capital | > 15% consistently |
| ROCE | EBIT ÷ Capital Employed | Return on all capital, including debt | > 15%; should exceed WACC |
| ROA | Net Profit ÷ Total Assets | Asset productivity; useful for banks | > 1% for banks; > 8% for others |
Liquidity ratios measure short-term survival. Solvency ratios measure long-term structural health. Both matter — a company can be solvent but illiquid (unable to pay next month's bills despite owning assets), or liquid but structurally over-leveraged.
| Ratio | Formula | Interpretation | Warning Signal |
|---|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | Short-term liquidity | < 1.0 for non-retail companies |
| Quick Ratio | (CA − Inventory) ÷ CL | Liquidity without inventory | < 0.7 |
| Debt-to-Equity | Total Debt ÷ Equity | Financial leverage | Sector-dependent; > 3x for most |
| Interest Coverage (ICR) | EBIT ÷ Interest Expense | Debt servicing ability | < 1.5x |
| Debt-to-EBITDA | Net Debt ÷ EBITDA | Years to repay debt from operations | > 4x suggests high leverage |
Efficiency ratios measure how well a company converts its assets and working capital into sales and cash. Low efficiency means the business ties up capital unnecessarily — keeping too much inventory, collecting receivables slowly, or running under-utilised assets.
| Ratio | Formula | What Low Numbers Mean |
|---|---|---|
| Asset Turnover | Revenue ÷ Total Assets | Assets underutilised; too much capital for revenue generated |
| Inventory Days | (Inventory ÷ COGS) × 365 | Inventory builds up; slow sales or poor planning |
| Receivable Days (DSO) | (Receivables ÷ Revenue) × 365 | Customers paying slowly; collections risk |
| Payable Days (DPO) | (Payables ÷ COGS) × 365 | If too low: not using supplier credit; if too high: stretched payables |
| Cash Conversion Cycle | Inventory Days + DSO − DPO | Positive CCC: company needs working capital; Negative CCC: float from suppliers |
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