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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 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 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...