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Managing money

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.

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

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