10 Formulas Every Business Owner Should Know
1. Inventory Turnover = Cost of Goods Sold/Average Inventory
Indicates the amount of money tied up in inventory, and thus inventory management effectiveness. The higher the turnover ratio, the better.
2. Receivables Turnover = Revenue/ Average Receivables
A high receivables turnover could mean either that collection is efficient, or that credit policies are too stringent.
3. Payables Turnover = Purchases/ Average Trade Payables
Cost of Goods Sold is often used as an approximation of purchases
4. Current Ratio = Current Assets/Current Liabilities
"Current Assets" means assets expected to be consumed or converted to cash within one year. A lower ratio means greater reliance on operating cash flow and financing to meet short term obligations.
5. Quick Ratio = Cash + Short Term Marketable Investments + Receivables/Current Liabilities
Includes only the more liquid "current" assets. This ratio is more conservative than the current ratio.
6. Cash conversion cycle = Days on hand + Days sales outstanding - # Days payable
The amount of time between the company investing in working capital, and collecting cash. A short cash-conversion cycle indicates greater liquidity.
7. Debt to Assets Ratio = Total Debt/Total Assets
The percentage of total assets financed by debt. Higher debt means higher financial risk and weaker solvency.
8. Debt to Equity Ratio = Total Debt/Total Shareholder's Equity
The amount of debt capital relative to equity capital. A ratio of 1 indicates equal amounts of debt and equity.
9. Gross Profit Margin = Gross Profit/Revenue
A high gross profit margin is the result of low materials cost and/or high product pricing.
10. Operating Profit Margin = Operating Income/Revenue
Changes in this ratio can reflect improvements or deterioration in operating costs, such as overhead.