5

MOST
IMPORTANT
FINANCIAL
RATIOS

BY
COMPOUNDING
QUALITY

Profitability Liquidity Leverage Efficiency Valuation

 PROFITABILITY RATIOS
Gross Profit Margin: Measures the percentage of
revenue exceeding the cost of goods sold (COGS)

Formula: (Revenue−COGS)/Revenue

Operating Profit Margin: Indicates the efficiency of a

company in controlling production and operational
costs

Formula: Operating Income/Revenue

Net Profit Margin: Shows the percentage of revenue

left after all expenses have been deducted

Formula: Net Income/Revenue

Return on Assets (ROA): Indicates how efficiently

assets are used to generate profit

Formula: Net Income/Total Assets

Return on Equity (ROE): Measures the return

generated on shareholders' equity

Formula: Net Income/Shareholder’s Equity

Return on Investment (ROI): Assesses the gain or

loss generated on an investment relative to its cost

Formula:
(Gain from Investment−Cost of Investment)/Cost of
Investment
 LIQUIDITY RATIOS
Current Ratio: Measures a company's ability to pay
short-term obligations with short-term assets

Formula: Current Assets/Current Liabilities

Quick Ratio (Acid Test): Similar to the current ratio

but excludes inventory from assets

Formula: (Current Assets−Inventories)/Current

Liabilities

Cash Ratio: Assesses a company's ability to pay off

short-term debt with cash and cash equivalents

Formula: Cash and Cash Equivalents/Current

Liabilities
 LEVERAGE (DEBT) RATIOS
Debt to Equity Ratio: Compares a company's total
liabilities to its shareholder equity

Formula: Total Liabilities/Shareholder’s Equity

Debt Ratio: Measures the proportion of a company’s

assets financed through debt

Formula: Total Debt/Total Assets

Interest Coverage Ratio: Assesses a company's

ability to pay interest on its outstanding debt

Formula: Earnings Before Interest and Taxes

(EBIT)/Interest Expenses
 EFFICIENCY RATIOS
Asset Turnover Ratio: Measures how effectively a
company uses its assets to generate revenue

Formula: Revenue/Total Assets

Inventory Turnover Ratio: Indicates how often

inventory is sold and replaced over a period

Formula: COGS/Average Inventory

Receivables Turnover Ratio: Measures how

efficiently a company collects its receivables

Formula: Net Credit Sales/Average Accounts

Receivable
 MARKET VALUE RATIOS
Price-to-Earnings Ratio (P/E): Compares a
company's share price to its earnings per share

Formula: Market Value per Share/Earnings per Share

(EPS)

Price-to-Book Ratio (P/B): Measures the market's

valuation of a company relative to its book value

Formula: Share Price/Book Value per Share

Dividend Yield: Shows the dividend income relative

to the share price

Formula: Dividend per Share/Price per Share

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Pieter Slegers
Compounding Quality