# Financial Ratios [Macrotrends - The Premier Research Platform for Long Term Investors](https://macrotrends.net) ## [[income-statement|Profitability]] Ratios - Gross Profit Margin = Gross Profit / Sales - Operating Profit Margin = Operating Profit / Sales - Net Profit Margin = Net Profit / Sales - Return on Assets (ROA) = Net Profit / Assets - Return on Equity (ROE) = Net Profit / Shareholders Equity -- much higher than ROA, the reason that companies use "financial leverage" - Earnings per Share (EPS) = Net Income / \#Shares - Price Earnings Ratio (PE) = (Price per Share) / (Earnings per Share) - Market Capitalization = \#Shares \* Price per Share ## Financial Leverage Ratios - Basics - Financial Leverage "equals" Debt - Debt used to grow profitability by creating more Assets - Multiplies performance of owner's investments (equity) - Higher leverage means higher risk - Debt-to-Equity = Total Liabilities / Equity - Assets-to-Equity = Assets / Equity ## Liquidity Ratios Indicates if you can pay your bills. - **Current** Ratio = **Current** Assets / **Current** Liabilities - 2.0 is a nominal goal, lower than 1.0 is a concern. - Ratio too high => over-conservative - Quick Ratio = (Current Asset - Inventories) / Current Liabilities - "Acid test" for inventory, assets that can be quickly turned into cash - Expected to be at or above 1.0 ## Efficiency Ratios How well are you managing the [[balance-sheet|balance sheet]]? Fundamentally, how well are you managing your [[cashflow|cash]]? - Days-of-Inventory = Inventory / (COGS / 360) - Inventory Turns = COGS / Inventory - Receivable Days = Accounts Receivable / (Sales / 360) - Payable Days = Payables / (COGS / 360) ## Working Capital and [[ccc|Cash Conversion Cycles]] - Working Capital = Current Assets - Current Liabilities - Can't go negative! - Cash needed for short-term liabilities - Working Capital Needed = Cash Conversion Cycle \* Sales per day