How to use the financial ratios calculator
- 1Open your latest balance sheet and your income statement (profit and loss) for the same year.
- 2Copy the balance sheet figures you have: current assets, inventory, cash, current and total liabilities, equity and total assets.
- 3Copy revenue, gross profit and net profit from the income statement. Use a minus sign if you made a loss.
- 4Leave any field blank if you do not have the number. Only the ratios that can be worked out are shown.
- 5Read each ratio and its one-line meaning, then compare them with businesses in your industry and with your own previous years.
Liquidity: can you pay the bills due this year?
Liquidity ratios compare what will turn into cash within about a year with what you must pay within a year. The current ratio counts all current assets. The quick ratio leaves out inventory, because stock on a shelf cannot pay a supplier until it sells. The cash ratio is the strictest test and counts only cash and near-cash such as short-term deposits.
A current ratio below 1 means short-term bills are larger than short-term assets, which is a warning sign for most small businesses. A very high ratio is not automatically good either: it can mean too much cash sitting idle or too much slow-moving stock.
Current ratio = Current assets ÷ Current liabilities Quick ratio = (Current assets − Inventory) ÷ Current liabilities Cash ratio = Cash ÷ Current liabilities
Debt: how much of the business is borrowed?
Debt-to-equity compares everything the business owes with what the owners have put in and left in. The debt ratio shows the share of your assets paid for by liabilities. Both rise when you borrow and fall as you pay down debt or keep profits in the business.
Lenders look at these numbers when you apply for a loan. Capital-heavy businesses such as manufacturing, property and transport usually carry more debt than consultancies or online shops, so a level that is normal in one industry can look risky in another.
Debt-to-equity = Total liabilities ÷ Total equity Debt ratio = Total liabilities ÷ Total assets × 100
Profitability: how well do sales and assets turn into profit?
Gross margin shows what is left of each sale after the direct cost of the product or service. Net margin shows what is left after every cost, including rent, wages, interest and tax. Return on assets and return on equity compare the year's profit with what the business owns and with what the owners have invested.
Use figures from the same period. If your balance sheet is dated at year end, use profit for the 12 months up to that date. Some analysts use the average of opening and closing assets or equity; this calculator uses the closing figure you enter.
Gross margin = Gross profit ÷ Revenue × 100 Net margin = Net profit ÷ Revenue × 100 Return on assets = Net profit ÷ Total assets × 100 Return on equity = Net profit ÷ Total equity × 100
Why there is no single healthy number
Healthy ranges vary by industry, business model and country. A supermarket can run safely on a current ratio under 1 because customers pay at the till while suppliers are paid later, while a builder waiting on staged payments may need 2 or more. Margins vary even more: grocery gross margins are thin, software margins are wide.
The most useful comparisons are with your own past years, to see the direction of travel, and with published averages for your industry, which trade associations, banks and accountants can often provide.
Worked example
A small homeware wholesaler has $120,000 of current assets (including $45,000 of inventory and $25,000 of cash), $60,000 of current liabilities, $90,000 of total liabilities, $150,000 of equity and $240,000 of total assets. Over the year it had $400,000 of revenue, $160,000 of gross profit and $32,000 of net profit.
| Current ratio | 120,000 ÷ 60,000 = 2.00× |
| Quick ratio | 75,000 ÷ 60,000 = 1.25× |
| Cash ratio | 25,000 ÷ 60,000 = 0.42× |
| Debt-to-equity | 90,000 ÷ 150,000 = 0.60× |
| Debt ratio | 90,000 ÷ 240,000 = 37.5% |
| Gross margin | 160,000 ÷ 400,000 = 40% |
| Net margin | 32,000 ÷ 400,000 = 8% |
| Return on assets | 32,000 ÷ 240,000 = 13.3% |
| Return on equity | 32,000 ÷ 150,000 = 21.3% |
The business can cover its short-term bills twice over, and still 1.25 times without selling any stock. It borrows less than its owners have invested and keeps 8 cents of every sales dollar as profit.