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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.
| Ratio | Indicator of | Method |
|---|---|---|
| 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 turnover | Number of times stock turns over | Cost of goods sold ÷ (0.5 x opening + closing stock) |
| Debtors turnover | Average time to collect debts | (Debtors x days in period) ÷ credit sales |
| Working capital | Liquidity of business | Current assets ÷ current liabilities |
| Liquidity (also known as quick assets ratio) | Solvency of business | Current assets (minus stock) ÷ current liabilities |
Also consider...
- Read about understanding financial terms and reports.
- Last reviewed: 17 Jul 2017
- Last updated: 27 Jun 2016