"Financial Ratios Cheat Sheet: 20+ Formulas for Profitability, Efficiency, Solvency and Valuation"
Ratios compress the three financial statements into comparable signals. A single ratio means little on its own — the craft is using them in groups, against peers, and across time. Below are the workhorse ratios organized in four families — the same ones our interactive simulator computes in real time.
1. Profitability
| Ratio | Formula | Interpretation |
|---|---|---|
| Gross margin | Gross profit ÷ revenue | Product strength and pricing power; trend beats level |
| Operating margin | EBIT ÷ revenue | Core-business efficiency; best for cross-company comparison |
| Net margin | Net income ÷ revenue | Bottom line, after interest and tax |
| ROE | Net income ÷ equity | Return on shareholders' money; >15% sustained is excellent — but check how much leverage is doing the work |
| ROA | Net income ÷ total assets | Strips out leverage; naturally lower in asset-heavy industries |
The DuPont decomposition is worth memorizing: ROE = net margin × asset turnover × equity multiplier. The same 20% ROE driven by margin (brand businesses), by turnover (retailers), or by leverage (financials) describes three entirely different animals.
2. Efficiency
| Ratio | Formula | Interpretation |
|---|---|---|
| Inventory turnover | COGS ÷ average inventory | Higher = goods sell faster; a sudden drop hints at stale stock |
| Receivables turnover | Revenue ÷ average receivables | Higher = collections are faster; steady decline signals loosening credit terms |
| Asset turnover | Revenue ÷ average total assets | Revenue generated per dollar of assets |
3. Solvency
| Ratio | Formula | Interpretation |
|---|---|---|
| Current ratio | Current assets ÷ current liabilities | >1.5 comfortable; <1 flags short-term pressure |
| Debt-to-assets | Total liabilities ÷ total assets | Highly industry-dependent; watch trend and peer position |
| Interest coverage | EBIT ÷ interest expense | Below ~2 the profit cushion over interest is thin |
4. Valuation and cash-flow quality
| Ratio | Formula | Interpretation |
|---|---|---|
| PE | Market cap ÷ net income | Most used, most misused: meaningless for loss-makers; cyclicals look cheapest at the peak |
| PB | Market cap ÷ book equity | Fits financials and asset-heavy businesses; pair with ROE |
| PS | Market cap ÷ revenue | For growth companies not yet profitable |
| EV/EBITDA | Enterprise value ÷ EBITDA | Neutralizes capital structure and depreciation policy; the acquirer's lens |
| Free cash flow (FCF) | CFO − CapEx | The foundation of valuation; chronic negative FCF makes reported "profit" suspect |
| P/FCF | Market cap ÷ FCF | Harder to dress up with accounting choices than PE |
| CFO / net income | Operating cash flow ÷ net income | Earnings quality; persistently <1 is a red flag |
Three disciplines for using ratios
- Always look at the trend. A five-year gross-margin curve is more honest than any single year's number.
- Always compare within the industry. A 30% gross margin is a miracle in groceries and a disaster in software.
- Distrust any single spectacular number. Sky-high ROE may just be sky-high leverage; a rock-bottom PE may mean earnings have peaked. Ratios explain each other — judgment lives in the combination.
Want to feel how these ratios move? Change one transaction or nudge the share price in our interactive simulator, and 20+ ratios recalculate instantly — it sticks far better than any formula table.