Financial Ratios Glossary

Understanding the key financial metrics that reveal a company's health, efficiency, and value. Each ratio tells a different part of the story.

Liquidity Ratios

Tap to expand

3 metrics

Current Ratio

What It Measures

Can the company pay its bills due soon? This compares what they own vs what they owe in the short term.

Formula

Current Ratio = Current Assets ÷ Current Liabilities

Current Assets = Cash, receivables, inventory. Current Liabilities = Debt and payables due within 1 year.

Why It Matters

Tells you if a company can cover its near-term bills. A ratio below 1 means they might struggle to pay what they owe.

Interpreting the Numbers

Good

1.5 – 3.0

Healthy cushion for obligations

1.0 – 1.5

Adequate but tight

Poor

< 1.0

Risk of missing payments

Quick Ratio (Acid-Test Ratio)

What It Measures

Same as current ratio, but ignores inventory since it takes time to sell. Tests if a company can pay bills with its most liquid assets.

Formula

Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities

Focuses on cash, marketable securities, and receivables only

Why It Matters

More conservative test of liquidity. A quick ratio above 1 means they can pay bills without selling products first.

Interpreting the Numbers

Good

> 1.0

Can pay bills without selling inventory

0.8 – 1.0

Manageable if cash flow is steady

Poor

< 0.8

May struggle with immediate debts

Cash Ratio

What It Measures

How much cash does the company have right now to pay its bills? This is the strictest liquidity test—only counts money in the bank.

Formula

Cash Ratio = Cash & Equivalents ÷ Current Liabilities

Cash equivalents include money market funds and short-term investments

Why It Matters

Shows the ultimate safety net. While few companies maintain high cash ratios, it reveals emergency payment ability.

Interpreting the Numbers

Good

> 0.5

Solid cash position

0.2 – 0.5

Normal for most companies

Poor

< 0.2

Limited cash reserves

Profitability Ratios

Tap to expand

3 metrics

Net Profit Margin

What It Measures

For every $1 in sales, how much does the company keep as profit after all expenses, taxes, and interest?

Formula

Net Profit Margin = (Net Income ÷ Revenue) × 100

Net Income = Revenue minus all costs, operating expenses, interest, and taxes

Why It Matters

Shows how efficiently a company turns sales into actual profit. Higher margins mean better pricing power or lower costs.

Interpreting the Numbers

Good

> 15%

Strong pricing power

5% – 15%

Average for most industries

Poor

< 5%

Thin margins, high competition

Return on Equity (ROE)

What It Measures

How good is the company at making money from what investors put in? It shows the return shareholders get on their investment.

Formula

ROE = (Net Income ÷ Shareholders' Equity) × 100

Shareholders' Equity = Total Assets minus Total Liabilities (book value)

Why It Matters

Shows management's effectiveness at using investor capital. Higher ROE means better returns—but watch for excessive debt inflating the number.

Interpreting the Numbers

Good

> 15%

Excellent use of shareholder capital

8% – 15%

Acceptable returns

Poor

< 8%

Underperforming for investors

Return on Assets (ROA)

What It Measures

How well does the company use everything it owns to make money? It shows if assets (buildings, equipment, etc.) are earning their keep.

Formula

ROA = (Net Income ÷ Total Assets) × 100

Total Assets = Everything the company owns (cash, inventory, property, equipment, etc.)

Why It Matters

Reveals asset efficiency. Software companies typically have higher ROA than manufacturing since they need less physical stuff.

Interpreting the Numbers

Good

> 8%

Efficient asset utilization

3% – 8%

Average asset productivity

Poor

< 3%

Underutilized assets

Leverage Ratios

Tap to expand

4 metrics

Debt-to-Equity Ratio

What It Measures

How much borrowed money vs owner money is the company using? Shows financial leverage and risk.

Formula

Debt-to-Equity = Total Debt ÷ Shareholders' Equity

Total Debt = All borrowed money. Equity = Book value owned by shareholders.

Why It Matters

High leverage magnifies returns in good times but magnifies losses in downturns. Utilities can handle more debt than tech startups.

Interpreting the Numbers

Good

< 1.0

More equity than debt, low risk

1.0 – 2.0

Moderate leverage

Poor

> 2.0

High debt burden, risky

Debt-to-Assets Ratio

What It Measures

What percent of everything the company owns was bought with borrowed money?

Formula

Debt-to-Assets = Total Debt ÷ Total Assets

Shows what percentage of assets are financed by debt

Why It Matters

A simpler way to see leverage. Below 40% is conservative. Above 60% means heavy reliance on borrowed money.

Interpreting the Numbers

Good

< 40%

Conservative financing

40% – 60%

Moderate debt levels

Poor

> 60%

Highly leveraged

Interest Coverage Ratio

What It Measures

Can the company easily afford to pay interest on its loans? Higher values mean safer debt payments.

Formula

Interest Coverage = EBIT ÷ Interest Expense

EBIT = Earnings Before Interest and Taxes (operating profit)

Why It Matters

Tells whether a company can afford its debt. A ratio below 1.5 means they might miss interest payments.

Interpreting the Numbers

Good

> 3.0

Comfortable debt payments

1.5 – 3.0

Adequate but vulnerable

Poor

< 1.5

Struggling with interest

Total Debt Ratio

What It Measures

How much of the company is funded by money they owe others? Includes all liabilities, not just loans.

Formula

Total Debt Ratio = Total Liabilities ÷ Total Assets

Total Liabilities = All debts plus accounts payable, deferred revenue, etc.

Why It Matters

Broader than debt-to-assets since it includes all obligations. Below 50% means more assets than liabilities.

Interpreting the Numbers

Good

< 50%

More assets than liabilities

50% – 70%

Higher obligations

Poor

> 70%

Heavy obligation burden

Valuation Ratios

Tap to expand

5 metrics

Price-to-Earnings (P/E) Ratio

What It Measures

How many years of profits are you paying for when you buy this stock? It shows market expectations.

Formula

P/E Ratio = Share Price ÷ Earnings Per Share

Also: Market Cap ÷ Net Income. Uses trailing (TTM) or forward earnings.

Why It Matters

High P/E suggests people expect big growth. Low P/E might mean it's a deal—or that something's wrong.

Interpreting the Numbers

Growth

> 25

High growth expectations

Fair Value

15 – 25

Average for S&P 500

Value

< 15

Potentially undervalued

Price-to-Book (P/B) Ratio

What It Measures

Is the stock price higher or lower than what the company actually owns? Compares market value to book value.

Formula

P/B Ratio = Share Price ÷ Book Value Per Share

Book Value = Shareholders' Equity (assets minus liabilities)

Why It Matters

Useful for banks and real estate. Below 1 might be a bargain. Above 3 means paying extra for the brand.

Interpreting the Numbers

Premium

> 3.0

High growth or brand value

Fair

1.0 – 3.0

Typical for mature companies

Discount

< 1.0

Below book value, potential value

Price-to-Sales (P/S) Ratio

What It Measures

How much are investors paying for each dollar the company earns in sales? Useful for companies without profits yet.

Formula

P/S Ratio = Market Cap ÷ Annual Revenue

Unlike P/E, this works even when companies aren't profitable

Why It Matters

Great for growth companies that reinvest all profits. Below 2 is cheap. Above 5 means investors expect huge future growth.

Interpreting the Numbers

Value

< 2

Cheap relative to sales

Fair

2 – 5

Typical for growing companies

Expensive

> 5

High growth expectations

PEG Ratio

What It Measures

Is the stock's price fair based on how fast the company is growing? Adjusts P/E for growth rate.

Formula

PEG Ratio = (P/E Ratio) ÷ (Annual EPS Growth Rate)

Growth rate typically uses projected 3-5 year EPS growth

Why It Matters

A PEG of 1 means the P/E fairly reflects growth. Below 1 might be underpriced. Above 2 could be too expensive for its growth.

Interpreting the Numbers

Undervalued

< 1.0

Growth not fully priced in

Fair

1.0 – 1.5

Fairly valued for growth

Overvalued

> 2.0

Expensive for its growth

EV/EBITDA

What It Measures

What's the company worth (including debt) compared to its operating profits? Better than P/E for comparing companies with different debt levels.

Formula

EV/EBITDA = (Market Cap + Debt - Cash) ÷ EBITDA

EV = Enterprise Value. EBITDA = Earnings Before Interest, Taxes, Depreciation, Amortization

Why It Matters

Gives a clearer picture of what you're really paying for the whole business, including its debt. Used heavily by professional investors.

Interpreting the Numbers

Attractive

< 10

Often a good deal

Fair

10 – 15

Average valuation

Expensive

> 15

Premium price

Growth Metrics

Tap to expand

3 metrics

Revenue Growth (YoY)

What It Measures

How much more (or less) did the company sell this year compared to last year? The most basic measure of business growth.

Formula

Revenue Growth = (Revenue - Last Year Revenue) ÷ Last Year Revenue × 100

Year-over-year (YoY) comparison eliminates seasonal effects

Why It Matters

Growing sales means the company is winning customers. Negative growth is a red flag unless there's a good reason.

Interpreting the Numbers

Strong

> 15%

Fast-growing business

Moderate

5% – 15%

Healthy, steady growth

Weak

< 5%

Slow or no growth

Earnings Growth (YoY)

What It Measures

Are the company's profits growing or shrinking compared to last year? Ultimately, profits matter most.

Formula

Earnings Growth = (Net Income - Last Year Net Income) ÷ Last Year Net Income × 100

Net Income = Total profit after all expenses

Why It Matters

Should grow at least as fast as revenue. If revenue grows but profits don't, costs are rising too fast.

Interpreting the Numbers

Strong

> 15%

Growing profits quickly

Moderate

5% – 15%

Steady profit growth

Weak

< 5%

Profits stagnating or falling

Asset Growth

What It Measures

Is the company getting bigger? This tracks growth in everything the company owns—cash, equipment, buildings, etc.

Formula

Asset Growth = (Total Assets - Last Year Assets) ÷ Last Year Assets × 100

Includes all assets: cash, receivables, inventory, property, equipment

Why It Matters

Should roughly match revenue growth. If assets grow much faster, the company might be making big acquisitions.

Interpreting the Numbers

Growing

> 10%

Company is expanding

Stable

0% – 10%

Maintaining size

Shrinking

< 0%

Company is contracting

Cash Flow Metrics

Tap to expand

3 metrics

Operating Cash Flow

What It Measures

How much actual cash is the business bringing in from day-to-day operations? This is real money, not just accounting numbers.

Formula

Operating Cash Flow = Cash from running the core business

Found directly on the cash flow statement (no calculation needed)

Why It Matters

Cash is king. A company can show accounting profits but still go bankrupt if it doesn't generate real cash.

Interpreting the Numbers

Healthy

Positive & growing

Generating real cash

Watch

Positive but flat

Cash generation stalled

Concern

Negative

Burning cash

Free Cash Flow

What It Measures

Cash left over after paying for equipment and keeping the business running. This is money available for dividends or paying off debt.

Formula

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Capital Expenditures (CapEx) = Money spent on buildings, equipment, etc.

Why It Matters

Positive FCF means the company generates more cash than it needs. Negative FCF means they need to borrow or raise money.

Interpreting the Numbers

Strong

Positive & growing

Excess cash available

Positive but small

Reinvesting most cash

Needs Cash

Negative

May need financing

Cash Flow Growth

What It Measures

Is the company generating more cash than last year? Tracks year-over-year change in operating cash flow.

Formula

Cash Flow Growth = (CFO - Last Year CFO) ÷ Last Year CFO × 100

CFO = Cash From Operations

Why It Matters

Cash flow growth should roughly follow profit growth. If profits grow but cash doesn't, something might be off.

Interpreting the Numbers

Strong

> 10%

Cash generation improving

Stable

0% – 10%

Steady cash flow

Declining

< 0%

Less cash than before

Financial Ratios Glossary

Understanding the key financial metrics that reveal a company's health, efficiency, and value. Each ratio tells a different part of the story.

Liquidity Ratios

Tap to expand

3 metrics

Current Ratio

What It Measures

Can the company pay its bills due soon? This compares what they own vs what they owe in the short term.

Formula

Current Ratio = Current Assets ÷ Current Liabilities

Current Assets = Cash, receivables, inventory. Current Liabilities = Debt and payables due within 1 year.

Why It Matters

Tells you if a company can cover its near-term bills. A ratio below 1 means they might struggle to pay what they owe.

Interpreting the Numbers

Good

1.5 – 3.0

Healthy cushion for obligations

1.0 – 1.5

Adequate but tight

Poor

< 1.0

Risk of missing payments

Quick Ratio (Acid-Test Ratio)

What It Measures

Same as current ratio, but ignores inventory since it takes time to sell. Tests if a company can pay bills with its most liquid assets.

Formula

Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities

Focuses on cash, marketable securities, and receivables only

Why It Matters

More conservative test of liquidity. A quick ratio above 1 means they can pay bills without selling products first.

Interpreting the Numbers

Good

> 1.0

Can pay bills without selling inventory

0.8 – 1.0

Manageable if cash flow is steady

Poor

< 0.8

May struggle with immediate debts

Cash Ratio

What It Measures

How much cash does the company have right now to pay its bills? This is the strictest liquidity test—only counts money in the bank.

Formula

Cash Ratio = Cash & Equivalents ÷ Current Liabilities

Cash equivalents include money market funds and short-term investments

Why It Matters

Shows the ultimate safety net. While few companies maintain high cash ratios, it reveals emergency payment ability.

Interpreting the Numbers

Good

> 0.5

Solid cash position

0.2 – 0.5

Normal for most companies

Poor

< 0.2

Limited cash reserves

Profitability Ratios

Tap to expand

3 metrics

Net Profit Margin

What It Measures

For every $1 in sales, how much does the company keep as profit after all expenses, taxes, and interest?

Formula

Net Profit Margin = (Net Income ÷ Revenue) × 100

Net Income = Revenue minus all costs, operating expenses, interest, and taxes

Why It Matters

Shows how efficiently a company turns sales into actual profit. Higher margins mean better pricing power or lower costs.

Interpreting the Numbers

Good

> 15%

Strong pricing power

5% – 15%

Average for most industries

Poor

< 5%

Thin margins, high competition

Return on Equity (ROE)

What It Measures

How good is the company at making money from what investors put in? It shows the return shareholders get on their investment.

Formula

ROE = (Net Income ÷ Shareholders' Equity) × 100

Shareholders' Equity = Total Assets minus Total Liabilities (book value)

Why It Matters

Shows management's effectiveness at using investor capital. Higher ROE means better returns—but watch for excessive debt inflating the number.

Interpreting the Numbers

Good

> 15%

Excellent use of shareholder capital

8% – 15%

Acceptable returns

Poor

< 8%

Underperforming for investors

Return on Assets (ROA)

What It Measures

How well does the company use everything it owns to make money? It shows if assets (buildings, equipment, etc.) are earning their keep.

Formula

ROA = (Net Income ÷ Total Assets) × 100

Total Assets = Everything the company owns (cash, inventory, property, equipment, etc.)

Why It Matters

Reveals asset efficiency. Software companies typically have higher ROA than manufacturing since they need less physical stuff.

Interpreting the Numbers

Good

> 8%

Efficient asset utilization

3% – 8%

Average asset productivity

Poor

< 3%

Underutilized assets

Leverage Ratios

Tap to expand

4 metrics

Debt-to-Equity Ratio

What It Measures

How much borrowed money vs owner money is the company using? Shows financial leverage and risk.

Formula

Debt-to-Equity = Total Debt ÷ Shareholders' Equity

Total Debt = All borrowed money. Equity = Book value owned by shareholders.

Why It Matters

High leverage magnifies returns in good times but magnifies losses in downturns. Utilities can handle more debt than tech startups.

Interpreting the Numbers

Good

< 1.0

More equity than debt, low risk

1.0 – 2.0

Moderate leverage

Poor

> 2.0

High debt burden, risky

Debt-to-Assets Ratio

What It Measures

What percent of everything the company owns was bought with borrowed money?

Formula

Debt-to-Assets = Total Debt ÷ Total Assets

Shows what percentage of assets are financed by debt

Why It Matters

A simpler way to see leverage. Below 40% is conservative. Above 60% means heavy reliance on borrowed money.

Interpreting the Numbers

Good

< 40%

Conservative financing

40% – 60%

Moderate debt levels

Poor

> 60%

Highly leveraged

Interest Coverage Ratio

What It Measures

Can the company easily afford to pay interest on its loans? Higher values mean safer debt payments.

Formula

Interest Coverage = EBIT ÷ Interest Expense

EBIT = Earnings Before Interest and Taxes (operating profit)

Why It Matters

Tells whether a company can afford its debt. A ratio below 1.5 means they might miss interest payments.

Interpreting the Numbers

Good

> 3.0

Comfortable debt payments

1.5 – 3.0

Adequate but vulnerable

Poor

< 1.5

Struggling with interest

Total Debt Ratio

What It Measures

How much of the company is funded by money they owe others? Includes all liabilities, not just loans.

Formula

Total Debt Ratio = Total Liabilities ÷ Total Assets

Total Liabilities = All debts plus accounts payable, deferred revenue, etc.

Why It Matters

Broader than debt-to-assets since it includes all obligations. Below 50% means more assets than liabilities.

Interpreting the Numbers

Good

< 50%

More assets than liabilities

50% – 70%

Higher obligations

Poor

> 70%

Heavy obligation burden

Valuation Ratios

Tap to expand

5 metrics

Price-to-Earnings (P/E) Ratio

What It Measures

How many years of profits are you paying for when you buy this stock? It shows market expectations.

Formula

P/E Ratio = Share Price ÷ Earnings Per Share

Also: Market Cap ÷ Net Income. Uses trailing (TTM) or forward earnings.

Why It Matters

High P/E suggests people expect big growth. Low P/E might mean it's a deal—or that something's wrong.

Interpreting the Numbers

Growth

> 25

High growth expectations

Fair Value

15 – 25

Average for S&P 500

Value

< 15

Potentially undervalued

Price-to-Book (P/B) Ratio

What It Measures

Is the stock price higher or lower than what the company actually owns? Compares market value to book value.

Formula

P/B Ratio = Share Price ÷ Book Value Per Share

Book Value = Shareholders' Equity (assets minus liabilities)

Why It Matters

Useful for banks and real estate. Below 1 might be a bargain. Above 3 means paying extra for the brand.

Interpreting the Numbers

Premium

> 3.0

High growth or brand value

Fair

1.0 – 3.0

Typical for mature companies

Discount

< 1.0

Below book value, potential value

Price-to-Sales (P/S) Ratio

What It Measures

How much are investors paying for each dollar the company earns in sales? Useful for companies without profits yet.

Formula

P/S Ratio = Market Cap ÷ Annual Revenue

Unlike P/E, this works even when companies aren't profitable

Why It Matters

Great for growth companies that reinvest all profits. Below 2 is cheap. Above 5 means investors expect huge future growth.

Interpreting the Numbers

Value

< 2

Cheap relative to sales

Fair

2 – 5

Typical for growing companies

Expensive

> 5

High growth expectations

PEG Ratio

What It Measures

Is the stock's price fair based on how fast the company is growing? Adjusts P/E for growth rate.

Formula

PEG Ratio = (P/E Ratio) ÷ (Annual EPS Growth Rate)

Growth rate typically uses projected 3-5 year EPS growth

Why It Matters

A PEG of 1 means the P/E fairly reflects growth. Below 1 might be underpriced. Above 2 could be too expensive for its growth.

Interpreting the Numbers

Undervalued

< 1.0

Growth not fully priced in

Fair

1.0 – 1.5

Fairly valued for growth

Overvalued

> 2.0

Expensive for its growth

EV/EBITDA

What It Measures

What's the company worth (including debt) compared to its operating profits? Better than P/E for comparing companies with different debt levels.

Formula

EV/EBITDA = (Market Cap + Debt - Cash) ÷ EBITDA

EV = Enterprise Value. EBITDA = Earnings Before Interest, Taxes, Depreciation, Amortization

Why It Matters

Gives a clearer picture of what you're really paying for the whole business, including its debt. Used heavily by professional investors.

Interpreting the Numbers

Attractive

< 10

Often a good deal

Fair

10 – 15

Average valuation

Expensive

> 15

Premium price

Growth Metrics

Tap to expand

3 metrics

Revenue Growth (YoY)

What It Measures

How much more (or less) did the company sell this year compared to last year? The most basic measure of business growth.

Formula

Revenue Growth = (Revenue - Last Year Revenue) ÷ Last Year Revenue × 100

Year-over-year (YoY) comparison eliminates seasonal effects

Why It Matters

Growing sales means the company is winning customers. Negative growth is a red flag unless there's a good reason.

Interpreting the Numbers

Strong

> 15%

Fast-growing business

Moderate

5% – 15%

Healthy, steady growth

Weak

< 5%

Slow or no growth

Earnings Growth (YoY)

What It Measures

Are the company's profits growing or shrinking compared to last year? Ultimately, profits matter most.

Formula

Earnings Growth = (Net Income - Last Year Net Income) ÷ Last Year Net Income × 100

Net Income = Total profit after all expenses

Why It Matters

Should grow at least as fast as revenue. If revenue grows but profits don't, costs are rising too fast.

Interpreting the Numbers

Strong

> 15%

Growing profits quickly

Moderate

5% – 15%

Steady profit growth

Weak

< 5%

Profits stagnating or falling

Asset Growth

What It Measures

Is the company getting bigger? This tracks growth in everything the company owns—cash, equipment, buildings, etc.

Formula

Asset Growth = (Total Assets - Last Year Assets) ÷ Last Year Assets × 100

Includes all assets: cash, receivables, inventory, property, equipment

Why It Matters

Should roughly match revenue growth. If assets grow much faster, the company might be making big acquisitions.

Interpreting the Numbers

Growing

> 10%

Company is expanding

Stable

0% – 10%

Maintaining size

Shrinking

< 0%

Company is contracting

Cash Flow Metrics

Tap to expand

3 metrics

Operating Cash Flow

What It Measures

How much actual cash is the business bringing in from day-to-day operations? This is real money, not just accounting numbers.

Formula

Operating Cash Flow = Cash from running the core business

Found directly on the cash flow statement (no calculation needed)

Why It Matters

Cash is king. A company can show accounting profits but still go bankrupt if it doesn't generate real cash.

Interpreting the Numbers

Healthy

Positive & growing

Generating real cash

Watch

Positive but flat

Cash generation stalled

Concern

Negative

Burning cash

Free Cash Flow

What It Measures

Cash left over after paying for equipment and keeping the business running. This is money available for dividends or paying off debt.

Formula

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Capital Expenditures (CapEx) = Money spent on buildings, equipment, etc.

Why It Matters

Positive FCF means the company generates more cash than it needs. Negative FCF means they need to borrow or raise money.

Interpreting the Numbers

Strong

Positive & growing

Excess cash available

Positive but small

Reinvesting most cash

Needs Cash

Negative

May need financing

Cash Flow Growth

What It Measures

Is the company generating more cash than last year? Tracks year-over-year change in operating cash flow.

Formula

Cash Flow Growth = (CFO - Last Year CFO) ÷ Last Year CFO × 100

CFO = Cash From Operations

Why It Matters

Cash flow growth should roughly follow profit growth. If profits grow but cash doesn't, something might be off.

Interpreting the Numbers

Strong

> 10%

Cash generation improving

Stable

0% – 10%

Steady cash flow

Declining

< 0%

Less cash than before