Beyond Margins: Unlocking Business Insights with Financial Ratios Once you've understood your financial statements and calculated your margins, the next step is using financial ratios to evaluate the performance and health of a business. 1. Categories of Financial Ratios a. Profitability Ratios Gross Profit Margin = (Gross Profit / Revenue) Net Profit Margin = (Net Income / Revenue) Return on Assets (ROA) = (Net Income / Total Assets) Return on Equity (ROE) = (Net Income / Shareholder Equity) b. Liquidity Ratios Current Ratio = (Current Assets / Current Liabilities) Quick Ratio = (Cash + Receivables / Current Liabilities) c. Efficiency Ratios Inventory Turnover = (COGS / Average Inventory) Receivables Turnover = (Revenue / Accounts Receivable) d. Leverage Ratios Debt-to-Equity Ratio = (Total Debt / Total Equity) Interest Coverage Ratio = (EBIT / Interest Expense) e. Valuation Ratios Price-to-Earnings (P/E) = (Mark...
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