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Free reference guide: Finratio
About Finratio
The Financial Ratio Reference provides 25+ essential financial ratio formulas organized into 6 categories — Profitability, Stability, Activity, Growth, Valuation, and Cash Flow. Each entry includes the formula, a numerical example with real figures, and interpretation guidelines indicating what constitutes a healthy vs. concerning value.
Profitability ratios cover gross margin, operating margin, net margin, ROE (return on equity with DuPont decomposition into net margin x asset turnover x leverage), and ROA. Stability ratios include current ratio (200%+ is stable), quick ratio (excludes inventory), debt-to-equity ratio (200% or below is typical), interest coverage ratio (ICR), and equity ratio.
Activity ratios detail asset turnover, accounts receivable turnover (with days-to-collect calculation using 365/turnover), inventory turnover, accounts payable turnover, and the cash conversion cycle (CCC = inventory days + receivable days - payable days). Valuation ratios cover PER, PBR, EV/EBITDA, and dividend yield. Cash flow ratios include operating cash flow ratio and free cash flow (FCF = operating cash flow - CAPEX).
Key Features
- DuPont analysis decomposition of ROE into net margin x total asset turnover x financial leverage
- Current ratio and quick ratio with stability thresholds (200%+ and 100%+ respectively)
- Interest coverage ratio (ICR) with warning level at below 1x (unable to cover interest payments)
- Cash conversion cycle (CCC) formula: inventory days + receivable days - payable days, with negative CCC interpretation
- CAGR formula with worked example: 5-year growth from 100 to 200 yielding 14.87% annual rate
- PER and PBR valuation with sector comparison guidance and under/overvaluation indicators
- EV/EBITDA calculation showing enterprise value = market cap + net debt, EBITDA = operating income + depreciation
- Free cash flow (FCF) formula distinguishing positive FCF (dividend/investment capacity) from negative FCF (external funding needed)
Frequently Asked Questions
What financial ratio categories does this reference cover?
Six categories are covered: Profitability (gross margin, operating margin, net margin, ROE, ROA), Stability (current ratio, quick ratio, debt ratio, ICR, equity ratio), Activity (asset turnover, receivable turnover, inventory turnover, payable turnover, CCC), Growth (revenue growth, operating income growth, EPS growth, CAGR), Valuation (PER, PBR, EV/EBITDA, dividend yield), and Cash Flow (operating cash flow ratio, FCF).
How does the DuPont analysis break down ROE?
The DuPont analysis decomposes ROE (Return on Equity) into three components: net profit margin (net income / revenue) x total asset turnover (revenue / total assets) x financial leverage (total assets / equity). This decomposition reveals whether high ROE comes from operational efficiency, asset utilization, or financial leverage, helping identify the true driver of shareholder returns.
What is the cash conversion cycle and why does it matter?
The CCC measures the time from cash outflow (buying inventory) to cash collection (receiving payment). The formula is: inventory holding period + accounts receivable collection period - accounts payable payment period. A shorter CCC means more efficient working capital management. A negative CCC (like Amazon's model) means the company collects from customers before paying suppliers, effectively using supplier funding for operations.
How do I interpret PER and PBR for stock valuation?
PER (Price-to-Earnings Ratio) = stock price / EPS — a PER of 10x means investors pay 10 times annual earnings. Compare against sector averages to judge over/undervaluation. PBR (Price-to-Book Ratio) = stock price / book value per share — a PBR below 1x means the stock trades below its net asset value, potentially indicating undervaluation (though it could also signal poor growth prospects).
What does an interest coverage ratio below 1x indicate?
An ICR (Interest Coverage Ratio) below 1x means the company's operating income is insufficient to cover its interest expenses — it literally cannot pay interest from operating profits. The formula is operating income / interest expense. For example, 300M / 100M = 3x means operating income covers interest three times over, indicating comfortable debt servicing capacity.
How is CAGR calculated and when should it be used?
CAGR (Compound Annual Growth Rate) = (ending value / beginning value)^(1/number of years) - 1. For example, growth from 100 to 200 over 5 years yields CAGR = (200/100)^(1/5) - 1 = 14.87%. CAGR smooths out year-to-year volatility and provides a single annualized growth rate, making it useful for comparing growth across different time periods or between companies.
What is the difference between current ratio and quick ratio?
Both measure short-term liquidity, but the quick ratio is stricter. Current ratio = current assets / current liabilities (200%+ is considered stable). Quick ratio = (current assets - inventory) / current liabilities (100%+ is stable). The quick ratio excludes inventory because it may not be easily convertible to cash, providing a more conservative view of a company's ability to meet short-term obligations.
How does free cash flow differ from net income?
Free cash flow (FCF) = operating cash flow - capital expenditures (CAPEX). Unlike net income, which includes non-cash items like depreciation and accruals, FCF represents actual cash available for dividends, debt repayment, or reinvestment. A company can report positive net income but negative FCF if it has heavy capital expenditure requirements, making FCF a more reliable indicator of financial flexibility.