Fundamental Ratios

Financial ratios for listed companies are typically grouped into several categories based on what aspect of the business they measure. Here are the standard groups:

1. Profitability Ratios
   Measure how efficiently a company generates profit relative to revenue, assets, or equity.
   Ratio Formula What It Shows
   Gross Profit Margin (Revenue − COGS) / Revenue Pricing power and production efficiency
   Operating Margin Operating Income / Revenue Core business profitability
   Net Profit Margin Net Income / Revenue Bottom-line profitability
   Return on Assets (ROA) Net Income / Total Assets Asset utilization efficiency
   Return on Equity (ROE) Net Income / Shareholders' Equity Returns generated for shareholders
   Return on Invested Capital (ROIC) NOPAT / Invested Capital Efficiency of total capital employed
2. Liquidity Ratios
   Assess the ability to meet short-term obligations (typically within one year).
   Ratio Formula What It Shows
   Current Ratio Current Assets / Current Liabilities Overall short-term solvency
   Quick Ratio (Acid Test) (Current Assets − Inventory) / Current Liabilities Immediate liquidity without selling inventory
   Cash Ratio Cash & Equivalents / Current Liabilities Most conservative liquidity measure
3. Leverage (Solvency) Ratios
   Evaluate long-term financial risk and capital structure.
   Ratio Formula What It Shows
   Debt-to-Equity Total Debt / Total Equity Reliance on debt vs. equity financing
   Debt-to-Assets Total Debt / Total Assets Percentage of assets financed by debt
   Interest Coverage EBIT / Interest Expense Ability to service debt payments
   Equity Ratio Total Equity / Total Assets Proportion of assets owned by shareholders
4. Efficiency (Activity) Ratios
   Measure how well a company utilizes its assets and manages operations.
   Ratio Formula What It Shows
   Asset Turnover Revenue / Average Total Assets Revenue generated per dollar of assets
   Inventory Turnover COGS / Average Inventory How quickly inventory is sold
   Days Sales Outstanding (DSO) (Accounts Receivable / Revenue) × 365 Average collection period
   Days Payable Outstanding (DPO) (Accounts Payable / COGS) × 365 Average payment period to suppliers
   Cash Conversion Cycle DSO + DIO − DPO Time from cash out to cash in
5. Valuation Ratios (Specific to Listed Companies)
   These are unique to publicly traded firms and compare market price to fundamentals.
   Ratio Formula What It Shows
   Price-to-Earnings (P/E) Share Price / EPS How much investors pay per dollar of earnings
   Price-to-Book (P/B) Market Cap / Book Value Premium paid over net asset value
   Price-to-Sales (P/S) Market Cap / Revenue Valuation relative to top-line sales
   EV/EBITDA Enterprise Value / EBITDA Valuation independent of capital structure
   Dividend Yield Annual Dividend / Share Price Income return from dividends
   PEG Ratio P/E / Earnings Growth Rate P/E adjusted for growth prospects
6. Growth Ratios
   Track the trajectory of key financial metrics.
   Ratio Formula What It Shows
   Revenue Growth Rate (Current Revenue − Prior Revenue) / Prior Revenue Top-line expansion
   Earnings Growth Rate (Current EPS − Prior EPS) / Prior EPS Bottom-line expansion
   Dividend Growth Rate Change in DPS over time Increasing shareholder payouts
7. Cash Flow Ratios
   Evaluate the quality of earnings and cash generation ability.
   Ratio Formula What It Shows
   Operating Cash Flow Ratio Operating Cash Flow / Current Liabilities Ability to cover short-term debts with cash
   Free Cash Flow Yield Free Cash Flow / Market Cap Cash return relative to market value
   Cash Flow to Debt Operating Cash Flow / Total Debt Debt coverage from operations
   Quality of Earnings Operating Cash Flow / Net Income Whether profits are backed by cash

How Analysts Use These Groups Together
• DuPont Analysis combines profitability, efficiency, and leverage:
ROE = Net Margin × Asset Turnover × Equity Multiplier
• Credit Analysis focuses on liquidity and leverage ratios.
• Equity Valuation emphasizes profitability, growth, and valuation ratios.
• Operational Review relies heavily on efficiency and cash flow ratios.