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.
|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|
- Read about understanding financial terms and reports.