The Formulas • Where to Find the Numbers • What Each Ratio Tells You

How to Calculate
Your Key Financial Ratios

Where to Find the Information

What the Ratios Tell

Current Ratio = Current Assets divided by Current Liabilities

Your balance sheet

Tests for solvency or ability to meet current debt obligations. Measures how well you can cover current liabilities with liquid assets.

(Higher is better; 2.0 is average.)

Quick Ratio = Cash + Accounts Receivable divided by Current Liabilities

Your balance sheet

Tests the degree of solvency most strictly, using only the most liquid current assets.

(Higher is better; 0.5 is average.)

Debt-to-Worth Ratio = Total Liabilities divided by Total Owner's Equity

Your balance sheet

Compares what the company "owes" creditors to what it "owns." Measures the financial strength of the business.

(Lower is better; 1.0 is average.)

Inventory Turnover= COGS (Cost of Goods Sold) divided by Average Inventory @Cost

COGS are recorded on your income statement; Inventory is found on your balance sheet.

Measures how often, at present rate of sales, your entire inventory is completely sold and replaced during a given year. Measures inventory "velocity."

(Higher is better; average depends on industry.)

Gross Margin %= Gross Profit $ divided by Net Sales

Your income statement (P&L)

Indicates percentage of sales dollars remaining after costs related to purchasing merchandise are recognized.

Profit Before Taxes %= Profit Before Taxes divided by Net Sales

Your income statement (P&L)

Indicates percentage of sales dollars remaining after all costs (except taxes) are recognized.

(Higher is better; average depends on industry.)

Return on Assets (ROA)= Profit Before Taxes divided by Net Assets

Your income statement and balance sheet

Indicates pretax return on assets; measures productivity of assets.

(Higher is better; average depends on industry.)

Gross Margin Return on Inventory (GMROI) = Gross Margin $ divided by Average Inventory @Cost

Gross Margin- your income statement Inventory @ Cost- your balance sheet.

Measures the gross margin returned for each dollar invested in inventory. (Higher is better; average depends on industry.)