Financial ratios
Clear definitions and practical examples to help you understand the numbers and decisions.
Current ratio
The current ratio is current assets divided by current liabilities at a stated date. It is a liquidity indicator, but its usefulness depends on whether receivables can be collected and inventory can be sold before obligations fall due.
Read the explanationQuick ratio
The quick ratio compares cash, near-cash assets, and usually receivables with current liabilities, excluding inventory. Its exact components must be stated because some receivables may be disputed or slow to collect.
Read the explanationCash ratio
The cash ratio compares cash and cash equivalents, and any specifically included highly liquid investments, with current liabilities. It is a narrow test of immediately available resources, not a measure of all cash expected to arrive.
Read the explanationDebt-to-equity ratio
Debt-to-equity compares a defined debt balance with equity at a stated date. It describes financing mix, but the definition must say whether leases, shareholder loans, and preferred instruments are included.
Read the explanationDebt-to-assets ratio
The debt-to-assets ratio divides a defined debt balance by total assets at a stated date. It shows one view of leverage, but it does not tell whether assets are liquid, accurately valued, or available to support debt.
Read the explanationInterest coverage ratio
Interest coverage ratio compares earnings available before interest and tax (EBIT) with the interest expense for the same period. It asks how many times the stated earnings measure covers the stated financing charge. A lender may define both figures differently from the published accounts, for example in its treatment of lease interest or permitted adjustments.
Read the explanationDebt service coverage ratio
Debt service coverage ratio, usually called DSCR, compares cash available for debt service with the principal and interest that must be paid during a stated period. It answers a different question from interest coverage: interest coverage asks whether earnings cover interest; DSCR asks whether the defined cash measure covers the full scheduled debt service.
Read the explanationNet debt
Net debt subtracts eligible cash and cash equivalents from defined borrowings. It shows how much debt would remain if that cash were applied to repayment. The calculation must state whether debt includes overdrafts, leases, and shareholder loans, and which cash balances are eligible.
Read the explanationNet debt to EBITDA
Net debt to EBITDA divides defined net debt by earnings before interest, tax, depreciation, and amortisation for a stated period, often the previous twelve months. It relates borrowing to an operating earnings measure. A result of three times does not mean the debt will be repaid in three years: EBITDA is not cash available for repayment.
Read the explanationAsset turnover
Asset turnover divides revenue for a period by average total assets for that period. It measures how much revenue the business generates for each unit of assets on its balance sheet. It measures use of the asset base, not profit: selling more at a loss can increase turnover.
Read the explanationReceivables turnover
Receivables turnover divides credit sales for a period by average trade receivables for that period. It expresses sales relative to the customer balances the business has had to finance. Cash sales should be excluded because they do not create receivables.
Read the explanationPayables turnover
Payables turnover divides credit purchases for a period by average trade payables for that period. It relates purchasing activity to the supplier credit supporting it. A lower turnover usually means balances remain outstanding longer, but does not reveal whether that delay was agreed.
Read the explanationReturn on assets
Return on assets (ROA) compares profit with the average assets used to earn it. One common version divides profit after tax by average total assets and expresses the result as a percentage. Other versions use an operating profit measure, so a comparison must name the numerator.
Read the explanationReturn on equity
Return on equity (ROE) divides profit attributable to a group of owners by their average equity for the same period. It measures accounting profit relative to the owners’ capital recorded in the business. The profit and equity figures must refer to the same ownership interest.
Read the explanationReturn on capital employed
Return on capital employed (ROCE) divides earnings before interest and tax (EBIT) by average capital employed. It measures operating profit against the longer-term capital supporting the business, before the split between lenders and owners.
Read the explanationReturn on invested capital
Return on invested capital (ROIC) divides net operating profit after tax (NOPAT) by average capital invested in operations. NOPAT removes financing effects so the operating return can be assessed before deciding how the business is funded.
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