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Written by Sarah Abbas
Fact checked by Antonio Di Giacomo
Updated 24 January 2025
Financial ratios are quantitative measures derived from a company’s financial statements. They help investors, analysts, and managers evaluate a company's performance and compare it to others in the industry.
This 2025 financial ratio cheat sheet will walk you through the essential metrics you need to know, why they're important, and how to use them effectively.
Financial ratios are essential tools for evaluating a company's performance and comparing it to industry standards.
Key financial ratios include liquidity, profitability, leverage, efficiency, and market value ratios.
Understanding and interpreting these financial ratios formulas can help investors make informed investment decisions.
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Let's break down the most critical financial ratios you should know in 2025. This financial ratio cheat sheet is your go-to resource for understanding these key metrics.
Liquidity ratios measure a company's ability to cover its short-term obligations with its short-term assets. They are crucial for assessing financial stability and ensuring a company can meet its immediate liabilities. Liquidity ratios include:
Current Ratio
Quick Ratio
Cash Ratio
Operating Cash Flow Ratio
The current ratio is calculated by dividing current assets by current liabilities. This ratio indicates whether the company can pay off its short-term debts with its short-term assets.
A ratio above 1 suggests the company has more assets than liabilities, which is generally a good sign of financial health.
Formula:
Current Ratio = Current Asset / Current Liabilities
Financial ratios formulas like this are vital when assessing liquidity and short-term stability.
The quick ratio, also known as the acid-test ratio, is a more rigorous measure of liquidity than the current ratio. It excludes inventory from current assets before dividing by current liabilities.
This ratio focuses on assets that can be quickly converted to cash, providing a clearer picture of a company’s ability to meet short-term obligations.
Quick Ratio = Current Asset - Inventory / Current Liabilities
The cash ratio is a stricter liquidity ratio compared to the current and quick ratios. It measures a company’s ability to cover its short-term obligations using only cash and cash equivalents, excluding inventory and other current assets.
This ratio is particularly useful for assessing the financial health of companies in situations where immediate liquidity is essential.
Cash Ratio = Cash and Cash Equivalents Current Liabilities
The operating cash flow ratio is a financial ratio that measures a company's ability to cover its short-term liabilities using the cash generated from its core business operations.
A higher operating cash flow ratio suggests that the company generates sufficient cash to meet its short-term obligations, reducing reliance on external financing.
Operating Cash Flow Ratio = Operating Cash Flow/Current Liabilities
Profitability ratios assess a company's ability to generate profit relative to sales, assets, or equity.
These ratios are vital for understanding how efficiently a company is operating and how well it is generating returns for its shareholders. They include:
Gross Profit Margin
Net Profit Margin
Return on Assets (ROA)
Return on Equity (ROE)
Operating Profit Margin
Dividend Yield
Gross profit margin is calculated by subtracting the cost of goods sold (COGS) from revenue and dividing it by revenue.
This ratio shows the percentage of revenue that exceeds the cost of goods sold, indicating how well a company controls its production costs.
Gross Profit Margin = COGS / Revenue
By including such financial ratios formulas, you can effectively evaluate a company's cost efficiency.
Net profit margin is the ratio of net income to revenue. It reflects the percentage of revenue that remains as profit after all expenses are deducted, including operating expenses, interest, taxes, and depreciation.
A higher net profit margin indicates better overall profitability and operational efficiency.
Net Profit Margin = Net Income / Revenue
ROA measures how efficiently a company uses its assets to generate profit. It’s calculated by dividing net income by total assets.
A higher ROA indicates that the company uses its assets effectively to generate earnings.
ROA = Net Income / Total Asset
This is one of the best financial ratios to evaluate a company’s operational efficiency.
ROE is the ratio of net income to shareholders' equity. It shows how effectively a company uses equity to generate profit.
A high ROE indicates that the company uses its equity base efficiently to grow its profits.
ROE = Net Income / Shareholder's Equity
Operating profit margin measures the percentage of revenue remaining after covering operating expenses such as wages, rent, and materials before accounting for interest and taxes.
This ratio helps investors evaluate the efficiency of a company's core operations. A higher operating profit margin indicates better operational efficiency and profitability.
Operating Profit Margin = Operating Income / Revenue
The dividend yield represents the return an investor can expect from dividends relative to the current stock price. It’s a critical ratio for income-focused investors who rely on dividends as a source of income.
A higher dividend yield suggests that the stock provides more income relative to its price.
Dividend Yield = Annual Dividends per Share / Price per Share
Leverage ratios evaluate the degree to which a company is utilizing borrowed money. By examining its debt levels relative to its equity and earnings, these ratios help assess a company's risk and financial stability. They include:
Debt-to-Equity Ratio
Interest Coverage Ratio
Equity Ratio
Debt Service Coverage Ratio (DSCR)
Debt-to-Asset Ratio
The debt-to-equity ratio is calculated by dividing total liabilities by shareholders' equity. This ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders’ equity.
A lower ratio suggests less risk, while a higher ratio indicates higher leverage and potentially greater financial risk.
Debt-to-Equity Ratio = Total Liabilities / Shareholder's Equity
The interest coverage ratio measures a company's ability to pay interest on its debt. It’s calculated by dividing earnings before interest and taxes (EBIT) by interest expenses.
A higher ratio indicates a better ability to meet interest obligations, which is a sign of financial health and stability.
Interest Coverage Ratio = EBIT / Interest Expenses
The equity ratio measures the proportion of a company’s assets financed by shareholders’ equity. A higher equity ratio indicates a more conservative capital structure, reducing the company's reliance on debt.
Equity Ratio = Shareholder's Equity / Total Assets
The DSCR measures a company’s ability to service its debt from its operating income.
A higher DSCR indicates a greater ability to cover debt payments, while a DSCR below 1 means the company may struggle to meet its debt obligations.
DSCR = Net Operating Income / Total Debt Service
The debt-to-asset ratio measures the proportion of a company's assets financed by debt. It indicates financial leverage and risk, showing how much of the company's resources depend on borrowed funds. A higher ratio suggests greater financial risk, while a lower ratio indicates stability.
Debt-to-Asset Ratio = Total Liabilities / Total Assets
Efficiency ratios measure how well a company utilizes its assets and manages its operations. These financial ratios help assess the effectiveness of a company’s operations and its ability to convert resources into revenue. These accounting ratios include:
Inventory Turnover Ratio
Asset Turnover Ratio
Days Sales Outstanding (DSO)
Days Inventory Outstanding (DIO)
The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. This ratio indicates how many times a company’s inventory is sold and replaced over a period.
A higher ratio suggests efficient inventory management and a faster turnover of inventory.
Inventory Turnover Ratio = COGS / Average Inventory
The asset turnover ratio is the ratio of sales to total assets. It measures how efficiently a company uses its assets to generate sales.
A higher ratio indicates better utilization of assets and operational efficiency.
Asset Turnover Ratio = Sales / Total Assets
DSO measures the average number of days it takes a company to collect payment after a sale. A lower DSO indicates that the company collects payments quickly, which is good for cash flow.
A higher DSO may suggest that the company is offering lenient credit terms or experiencing delays in collections.
DSO = (Accounts Receivable / Total Sales) x Number of Days
DIO shows the average number of days inventory is held before being sold. A lower DIO indicates efficient inventory management, while a higher DIO suggests slow inventory turnover.
Companies with high DIO may face excess inventory issues, leading to increased storage costs and potential markdowns.
DIO = (Average Inventory / Cost of Goods Sold) x Number of Days
Market value ratios help investors evaluate the market price of a company's stock relative to its financial performance. These are essential stock metrics cheat sheet tools. These ratios are crucial for assessing the value and growth potential of a company’s stock. They include:
Price-to-Earnings (P/E) Ratio
Price-to-Book (P/B) Ratio
Price-to-Sales (P/S) Ratio
Earnings Yield
The P/E ratio is calculated by dividing the current market price per share by earnings per share (EPS). This ratio indicates how much investors are willing to pay for each dollar of earnings.
A high P/E ratio suggests that investors expect higher future growth.
P/E Ratio = Market price per share / EPS
The P/B ratio is the ratio of the market price per share to the book value per share. It compares a company’s market value to its book value, indicating whether a stock is over or undervalued.
P/B Ratio = Market price per share / Book Value per Share
The P/S ratio compares a company's stock price to its revenue per share, showing how much investors are willing to pay for each dollar of sales. A lower P/S ratio may indicate that the stock is undervalued.
P/S Ratio = Market Price per Share / Revenue per Share
Earnings yield is a financial ratio that measures the earnings generated per share relative to the stock's market price. It helps investors assess the potential return on investment based on earnings rather than stock price growth.
A higher earnings yield suggests an undervalued stock, while a lower yield may indicate overvaluation.
Earnings Yield = Earnings Per Share (EPS) / Market Price Per Share
Knowing how to calculate these financial ratios in 2025 is crucial for making informed decisions. Here are some formulas and some examples to help you get started.
Formulas and Examples
Current Ratio: Current Assets / Current Liabilities
Example: $500,000 / $250,000 = 2.0
Gross Profit Margin: (Revenue - COGS) / Revenue
Example: ($1,000,000 - $600,000) / $1,000,000 = 0.4 or 40%
ROA: Net Income / Total Assets
Example: $100,000 / $1,000,000 = 0.1 or 10%
Debt-to-Equity Ratio: Total Liabilities / Shareholders' Equity
Example: $300,000 / $500,000 = 0.6
Interest Coverage Ratio: EBIT / Interest Expenses
Example: $200,000 / $50,000 = 4.0
Asset Turnover Ratio: Sales / Total Assets
Example: $1,000,000 / $1,000,000 = 1.0
P/E Ratio: Market Price per Share / EPS
Example: $50 / $5 = 10
Interpreting financial ratios formulas involves understanding what the numbers mean in context. This financial ratios cheat sheet explains how to make sense of these ratios.
Comparing ratios to industry benchmarks helps determine how a company performs relative to its peers. Each industry has different standards, so what’s considered good in one sector might not be the same in another.
Analyzing financial ratios over time can reveal trends and patterns. For example, a steadily increasing ROA might indicate improving efficiency, while a declining current ratio could signal potential liquidity issues.
Financial ratios are also useful for comparing companies within the same industry. This can help identify which companies are performing better and why. It’s important to compare similar companies to ensure the ratios are meaningful.
While financial ratios are helpful for analyzing a company's financial health, they have some limitations:
Industry Differences – Ratios vary across industries, making comparisons tricky. A good ratio in one sector might not be ideal in another.
Manipulation Risk – Companies can adjust financial statements to make financial ratios look better, which may mislead investors.
Lack of Context – Ratios provide numbers but don’t explain the reasons behind trends or consider qualitative factors like management quality.
Historical Data – Most financial ratios formulas rely on past data, which may not reflect future performance accurately.
Accounting Differences – Different accounting methods can affect accounting ratios, making company comparisons difficult.
Inflation Impact – Inflation can distort ratio values, affecting their accuracy over time.
Despite these challenges, using a financial ratios cheat sheet alongside other analysis methods provides valuable insights into a company’s performance.
Understanding and utilizing financial ratios formulas is essential for making informed investment decisions. This financial ratio cheat sheet has provided you with a comprehensive overview of the key ratios you need to know in 2025. By mastering these accounting ratiosmetrics, you'll be better equipped to analyze companies, compare their performance, and make smarter investment choices.
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The five key financial ratios are the Current Ratio, Quick Ratio, Gross Profit Margin, Net Profit Margin, and Return on Equity (ROE).
Financial ratios are quantitative metrics derived from financial statements used to evaluate a company's performance and compare it to industry standards.
There is no single best financial ratio; it depends on the context and what aspect of the company's performance you are analyzing (e.g., liquidity, profitability, efficiency).
The current ratio includes all current assets (such as inventory) in its calculation, while the quick ratio excludes inventory to focus on assets that can be quickly converted to cash. The quick ratio is, therefore, a more conservative measure of liquidity than the current ratio.
The most important financial ratios for investors often include the Price-to-Earnings (P/E) ratio, Return on Equity (ROE), Debt-to-Equity ratio, and Free Cash Flow to Equity (FCFE). These ratios help assess a company's profitability, financial health, and potential for future growth.
SEO content writer
Sarah Abbas is an SEO content writer with close to two years of experience creating educational content on finance and trading. Sarah brings a unique approach by combining creativity with clarity, transforming complex concepts into content that's easy to grasp.
Market Analyst
Antonio Di Giacomo studied at the Bessières School of Accounting in Paris, France, as well as at the Instituto Tecnológico Autónomo de México (ITAM). He has experience in technical analysis of financial markets, focusing on price action and fundamental analysis. After many years in the financial markets, he now prefers to share his knowledge with future traders and explain this excellent business to them.
This written/visual material is comprised of personal opinions and ideas and may not reflect those of the Company. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. XS, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same. Our platform may not offer all the products or services mentioned.
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