RATIOS FORMULA SHEET

Category Ratio Formula Expressed Description

As
Profitability The amount that is added to the cost price of a product to get to the selling price.
Shows gross Profit in relation to cost of goods sold.
Gross Profit
×100 Interpretation: for every $1 spent in COGS, x% is made in gross profit.
Markup Cost of Goods Sold %
The higher the better as it means gross profit is larger as compared to costs or that
costs are smaller as compared to gross profit.

When gross profit is shown as a % of the selling price.

Gross Profit Interpretation: for every $1 made in sales, x% is made in gross profit.
Gross Profit Margin/Percentage ×100 %
Sales
The higher the better indicating that a higher portion of sales contributes to gross
profit.

Net profit is compared to sales/revenue.

Interpretation: for every $1 made in sales, x% is made in NET profit.

Net Profit
Net Profit Percentage ×100 % The higher the better indicating that a higher portion of sales contributes to net
Sales
profit.

*the difference between net and gross profit is operating expenses.*

ROCE % Shows net profit in relation to capital invested into the business. Shows the rate of
Net Profit before interest return on capital invested/employed.
×100
Capital employed∨invested
Interpretation: For every $1 of capital employed, the company can generate x% in
profit.
Net Profit before interest
×100
Average Capital The higher the better as it shows that the company is able to better utilize (employ)
its capital to make a profit.
 Measures all or individual expenses in relation to sales or revenue.

Interpretation: For every $1 made in sales, x% is spent on operating expenses.

Expense
×100
Operating Expenses/Revenue Revenue∨Sales % Examples: Rent/Revenue Ratio, Wages and Salaries to Sales Ratio

The lower the better, as it will indicate that a smaller proportion of sales is used to
cover expenses, leaving more for profitability and other costs.

Shows how much excess capital/liquid assets exists after current liabilities are
covered. Working capital is needed to fund day to day business activities.
Working Capital Current assets - current liabilities $$
A positive figure $ is ideal. Generally the higher the better.**Too high can indicate
too much idle liquidity.

Shows how many times the liquid/short term/current assets of the business can pay
for current/short term liabilities. Indicates if the business can meet short term
financial obligations.
Current assets
Current Ratio/
Current liabilities 1:1
Working Capital Ratio 1:1 or higher is ideal, the higher the better but too high indicates too much idle
liquid assets. <1:1 indicates an inability to meet current liabilities with current
Liquidity
assets.

Indicates if the business can meet short term financial obligations (debt) using its
most liquid assets. Inventory can be considered as it is the least liquid and may take
Current assets – inventory
Acid Test Ratio/ some time to convert to cash especially if stock is outdated.
Current liabilities 1:1
Quick Ratio
1:1 or a little lower (eg 0.9:1) is acceptable.

Activity/ Shows the number of times per year inventory is sold out and replenished. Measures
Turnover Cost of Goods Sold how efficiently a company uses/sells its inventory.
Average Inventory
Inventory Turnover # of times The higher the figure the better, meaning that inventory is fast moving and not slow
to sell and stagnant.
 Indicates how quickly debtors settle their outstanding balances.

Accounts Receivable Turnover Accounts Receivable The smaller the figure, or shorter the time, the better. The faster customers pay, the
x 365 # of days
Ratio Credit Sales faster the business can access that cash and spend on inventory or pay its bills.

Measures the length of time the business takes to pay its creditors.
Accounts Payable
Accounts Payable Turnover Ratio x 365 The higher the figure, the better. The slower the business takes to pay its suppliers,
Credit Purchases # of days
the longer it has access to the funds to buy inventory and pay other bills. However,
“too long” may discourage suppliers from allowing them a credit facility.