Financial Ratio Calculator Business & Investment Ratios

Financial ratios are also used by bankers, investors, and business analysts to assess various attributes of a company’s financial strength or operating results. Profitability ratios measure a company’s ability to generate earnings relative to revenue, assets, or equity. Income from Unleveraged Assets is the income generated by the assets funded by shareholders equity and operations. Use the Debt to Tangible Net Worth Calculator above to calculate the debt to tangible net worth from your financial statements. Return on Common Equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

The income statement shows the financial effects of activities over a given period of time. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy.

When a company generally boasts solid ratios in all areas, any sudden hint of weakness in one area may spark a significant stock sell-off. Ratio analysis is often used by investors, but it can also be used by the company itself to evaluate how strategic changes have impacted sales, growth, and performance. The Dividend Payout Ratio is the percentage of earnings that are paid out to shareholders. Earnings not paid to shareholders are expected to be retained by the company and invested in further operations. The Debt Ratio indicates what proportion of debt a company has relative to its assets.

Financial Statement Analysis

Ratio analysis can help investors understand a company’s current performance and likely future growth. However, companies can make small changes that make their stock and company ratios more attractive without changing any underlying financial fundamentals. To counter this limitation, investors also need to understand the variables behind ratios, what information they do and do not communicate, and how they are susceptible to manipulation. Ratio analysis is a method of examining a company’s balance sheet and income statement to learn about its liquidity, operational efficiency, and profitability. It doesn’t involve one single metric; instead, it is a way of analyzing a variety of financial data about a company. Use the Inventory Turnover Period in Days Calculator to calculate the inventory turnover period in days from your financial statements.

How Ratio Analysis Works

Ratio analysis can be used to understand the financial and operational health of a company; static numbers on their own may not fully explain how a company is performing. Though this seems ideal, the company might have had a negative gross profit margin, a decrease in liquidity ratio metrics, and lower earnings compared to equity than in prior periods. This means the company is performing below its competitors in spite of its high revenue. Comparative ratio analysis can be used to understand how a company’s performance compares to similar companies in the same industry. For example, a company with a 10% gross profit margin may be in good financial shape if other companies in the same sector have gross profit margins of 5%. However, if the majority of competitors achieve gross profit margins of 25%, that’s a sign that the original company may be in financial trouble.

Understanding Profitability Ratios

Hypothetical illustrations may provide historical or current performance information. Consider the inventory turnover ratio that measures how quickly a company converts inventory to a sale. A company can track its inventory turnover over a full calendar year to see how quickly it converted goods to cash each month. Then, a company can explore the reasons certain months lagged or why certain months exceeded expectations.

Accounts Receivable Turnover is used to quantify a firm’s effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. The Return on Invested Capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company’s return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. Though some benchmarks are set externally (discussed below), extraordinary items on income statement ratio analysis is often not a required aspect of budgeting or planning.

1. Times Interest Earned is used to measure a company’s ability to meet its debt obligations.
2. It indicates what proportion of equity and debt the company is using to finance its tangible assets.
3. This is done by financing the company’s assets with debt, which requires a fixed payment of interest.
4. Use the Asset Turnover (Du Pont) Calculator to calculate the asset turnover and Du Pont ratios from your financial statements.
5. Use the Sustainable Growth Rate Calculator to calculate the sustainable growth rate from your financial statements.
6. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

We can then determine the amount that each set of assets contributes to net income. We would expect that management would be able to use assets financed by debt to generate enough net income to pay the borrowing costs, and hopefully produce additional income for the shareholders. Return on Equity provides the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

The Debt to Tangible Net Worth Ratio is a measure of a company’s financial leverage to the tangible asset value of owner’s equity. It indicates what proportion of equity and debt the company is using to finance its tangible assets. Working Capital Turnover measures the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.