Financial Ratio Calculator
Liquidity, leverage, return and working capital ratios from one set of figures, with return on equity taken apart by DuPont so leverage is visible.
Revenue $2,400,000.00
Gross profit $1,320,000.00, 55%
Operating profit $360,000.00, 15%
Net income $246,480.00, 10.3%
Liquidity
current ratio 1.71
quick ratio 1.21, the same without stock
cash ratio 0.35
working capital $370,000.00
reading between 1 and 3, which is the ordinary range
Leverage
debt to equity 0.74
debt to assets 35.6%
equity multiplier 2.07
interest cover 7.50×
reading interest is comfortably covered by operating profit
Returns
return on assets 14.17%
return on equity 29.34%
DuPont, margin 10.27%
DuPont, asset turnover 1.38
DuPont, equity multiplier 2.07
multiplied together 29.34%
which is the return on equity, decomposed into the three things that move it
Working capital cycle
days sales outstanding 62.4 days to get paid
days inventory outstanding 87.9 days of stock
days payables outstanding 99.7 days to pay suppliers
cash conversion cycle 50.5 days
which means you fund 50.5 days of trading yourself
Return on equity is 29.34%, and DuPont splits it into a 10.27% margin,
asset turnover of 1.38 and an equity multiplier of 2.07. The third one
is leverage: borrowing raises return on equity without the business
earning any more per sale, which is why a high figure has to be read
next to the debt.
Every ratio here needs a comparison to mean anything. Against the same
business last year, and against the industry: a current ratio of 3 is
prudent in manufacturing and idle cash in software, and nothing in the
number itself tells you which.
The cash conversion cycle is 50.5 days: 62.4 to get paid plus 87.9 days
of stock less 99.7 days of supplier credit. That is the period you fund
out of your own pocket, and shortening it releases cash without selling
anything more.
The quick ratio drops inventory because stock is the current asset least
likely to become cash quickly. For a business whose stock does turn
quickly, the current ratio is the fairer measure; for one sitting on
slow-moving inventory, the quick ratio is the honest one.
Interest cover below about two is where lenders start asking questions,
and a covenant usually sits somewhere near there. It is the ratio most
likely to be written into a loan agreement, so it is the one worth
watching before it moves.
These ratios use one point in time for the balance sheet and a period
for the income statement, which mixes a snapshot with a film. Using an
average balance is more correct and rarely changes the conclusion.
Negative equity makes the return and leverage ratios meaningless rather
than bad. If accumulated losses have taken equity below zero, the ratio
arithmetic stops being informative and the balance sheet itself is the
thing to read.
This is arithmetic, not analysis. Ratios point at questions: why has the
margin moved, why is stock rising faster than sales, why is the cycle
lengthening. The answers are in the business rather than the
spreadsheet.
Output is valid and updates as you type.
Fix the highlighted fields to update the output.
Return on equity of 29 percent sounds like a good business. Take it apart and it is a 10.3 percent margin, asset turnover of 1.38, and an equity multiplier of 2.07. The third of those is borrowing: it raises return on equity without the business selling any more or earning a penny more per sale.
That decomposition is DuPont, and it is the reason a single ratio is never an answer. A current ratio of 3 is prudent in manufacturing and idle cash in a subscription business. A debt-to-equity of 2 is ordinary for a utility and alarming for a software company. Every ratio here is a comparison waiting for something to compare against.
How to use
- Put in the income statement figures, then the balance sheet ones.
- Read the ratios in groups rather than individually.
- Compare each one against the same business last year and against the industry, not against a rule.
Example
Revenue $2,400,000.00
Gross profit $1,320,000.00, 55%
Operating profit $360,000.00, 15%
Net income $246,480.00, 10.3%
Liquidity
current ratio 1.71
quick ratio 1.21, the same without stock
cash ratio 0.35
working capital $370,000.00
Leverage
debt to equity 0.74
equity multiplier 2.07
interest cover 7.50×
Returns
return on assets 14.17%
return on equity 29.34%
DuPont, margin 10.27%
DuPont, asset turnover 1.38
DuPont, equity multiplier 2.07
multiplied together 29.34%
Working capital cycle
days sales outstanding 62.4 days to get paid
days inventory outstanding 87.9 days of stock
days payables outstanding 99.7 days to pay suppliers
cash conversion cycle 50.5 daysFifty days is the period this business funds out of its own pocket. Shortening it releases cash without selling anything more, which is usually the cheapest money available.
Pitfalls
Leverage flatters return on equity. Borrowing raises the equity multiplier and therefore the return, with no improvement in the business. Read return on assets next to it: that one is not affected by how the assets were funded.
A ratio without a comparison is an observation. Against last year, and against the industry. Published benchmarks are usually broad enough to be nearly useless, so your own trend is the more informative comparison.
The quick ratio exists because stock may not sell. For a business whose inventory turns quickly the current ratio is fair; for one sitting on slow-moving stock the quick ratio is the honest number, and the gap between them tells you which you are.
A high current ratio is not automatically good. Above about 3 it often means cash and stock sitting idle, earning nothing. The optimum depends on how predictable the cash flows are.
Interest cover is the covenant ratio. Below about 2 is where lenders ask questions, and a loan agreement often has a test near there. It is the ratio most worth watching before it moves rather than after.
Mixing a snapshot with a period. These ratios divide an income statement covering a year by a balance sheet from one day. Using the average of the opening and closing balance is more correct and rarely changes the conclusion.
Negative equity makes the ratios meaningless rather than bad. If accumulated losses have taken equity below zero, return on equity and debt-to-equity stop being informative, and the balance sheet itself is the thing to read.
The cash conversion cycle can be negative, and that is strong. It means suppliers fund your trading. Large retailers run that way deliberately.
Compatibility
Arithmetic in the browser: nothing is uploaded and nothing is stored, which matters for figures like these.
Net income is derived as operating profit less interest, taxed at the rate given, so the ratios reconcile against each other rather than being entered independently. The test suite asserts that the DuPont product equals return on equity exactly, which is the identity the whole decomposition rests on.
The working capital days use 365 and the period’s cost of goods, which is the convention. Days payables outstanding against cost of goods rather than total purchases is the usual simplification and slightly overstates the days when a lot of spend sits outside cost of goods.
Impossible balance sheets are refused rather than calculated: current assets above total assets, inventory above current assets, equity of zero or less. Each of those indicates a figure typed into the wrong field.