Types of financial ratios

A ratio that contains 1 or more financial figures is a 'financial ratio'.

You can use ratios to simplify financial and non-financial data to monitor and improve your business performance.

Key financial ratios

The following table provides a quick summary of key financial ratios, what they indicate and how to calculate them.

RatioIndicator ofMethod
Gross profit margin% of gross profit on sales(Gross profit x 100) ÷ sales
Net profit margin% of net profit on sales(Net profit before tax x 100) ÷ sales
Material to sales% of sales dollars spent on materials(Direct materials x 100) ÷ sales
Labour to sales% of sales dollars spent on labour(Direct labour x 100) ÷ sales
Overhead expenses to sales% of sales dollars spent on overhead expenses(Overhead expense x 100) ÷ sales
Stock turnoverNumber of times stock turns overCost of goods sold ÷ (0.5 x opening + closing    stock)
Debtors turnoverAverage time to collect debts(Debtors x days in period) ÷ credit sales
Working capitalLiquidity of businessCurrent assets ÷ current liabilities
Liquidity (also known as quick assets ratio)Solvency of businessCurrent assets (minus stock) ÷ current liabilities

Also consider...