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

Measure how well your business is using assets and resources and how effective your business operations are

  • 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

Your situation may not be typical. Seek professional advice before using this information to make decisions in your business.

www.business.qld.gov.au
Queensland Government

Download our Quick reference guide to financial ratios (JPG, 340KB).