# Quick reference guide to financial ratios – infographic transcript

Use our quick reference ratios infographic (JPG, 340KB) to learn how to calculate financial ratios when assessing the performance of your business.

## Quick reference guide to financial ratios

### Liquidity ratios

Measure your business’s ability to turn assets into cash in order to repay debts or make purchases or investments

• Current ratio (working capital ratio) = Current assets ÷ Current liabilities
Aim for: between 1.5 and 2 (for most industries)
• Quick ratio (acid-test ratio) = (Current assets – Inventory) ÷ Current liabilities
Aim for: 1.0 or greater

### Operating efficiency ratios

• Inventory turnover (stock turnover) = Cost of goods sold ÷ Average inventory
Aim for: between 5 and 10 (good for most industries)
• Asset turnover = Net revenue ÷ Total assets
Aim for: a higher ratio means you're efficient at generating revenue from your assets.
• Accounts receivable days (debtor days) = (Accounts receivable ÷ Total credit sales) × 365 days
Aim for: less than 45 days. However this is dependent on a range of factors.
• Accounts payable days (creditor days) = (Accounts payable ÷ Total purchases on account) × 365 days
Aim for: less than 30 days. However this is dependent on a range of factors.
• Operating expense margin = (Total operating expenses ÷ Total revenue) × 100
Aim for: 40% or lower is excellent. Less than 60% is good (varies by industry)

### Profitability ratios

Measure your business's profits (the amount of money remaining after all expenses and debts are paid

• Gross profit margin = (Gross profit ÷ Total revenue) × 100
Aim for: 50% or higher. However this may differ between industries (e.g. 25% for retail)
• Net profit margin = (Net profit ÷ Total revenue) × 100
Aim for: 10% (average), 20% (high), 5% (low) – varies by industry and other factors
• Return on assets (return on investment) = (Net profit ÷ Total assets) × 100
Aim for: 5% (good), 20% or higher (excellent)

### Leverage ratios

Measure your business's ability to meet its debt obligations from sources other than cash flow

• Debt ratio = Total liabilities ÷ Total assets
Aim for: below 1.0 (safe), 2.0 or higher (risky). Investors generally look for between 0.3 and 0.6
• Debt to equity ratio = Total liabilities ÷ Owner’s equity
Aim for: 1 to 1.5 (varies by industry and other factors)
• Interest coverage ratio = Net profit ÷ interest expenses