How to Decode Company Performance: Essential Financial Ratios

What are these financial ratios?

A financial ratio is a quantitative measure that expresses the relationship between two financial variables. These ratios show the company’s profitability, liquidity & efficiency. By comparing different ratios, we can get a rough idea of the company’s sustainability.

1. Gross Profit Margin

Gross Profit Margin =  (Gross Profit / Revenue) * 100%

Goss Profit Margin (GPM) is a financial ratio that measures a company’s profitability. It is calculated by gross profit divided by the total revenue. We can have the gross profit by subtracting the cost of goods sold from total revenue.

2. Net Profit Margin

Net Profit Margin =  (Net Profit / Revenue) * 100%

Net Profit Margin (NPM) is a financial ratio that gives how much a company profits from the revenue. It is calculated by net profit divided by the total revenue.

3. Return On Equity

Return On Equity = (Net Profit / Shareholders’ Equity) * 100%

Return on Equity (ROE) is a financial ratio that shows how effectively company management is using its shareholders’ equity to generate profit. ROE is calculated by dividing net profit by shareholders’ equity.

4. Return On Assets

Return On Assets = (Net Profit / Total Assets) * 100%

Return On Assets (ROA) indicates the percentage of profit a company earns from its total assets. It is calculated by dividing net profit by total assets. ROA provides insight into how the company management uses the company’s assets to make a profit. The higher the ratio the management is using assets to generate higher profits.

5. Debt-to-Equity

Debt-to-Equity = (Total Debt / Total Equity) * 100%

The Debt-to-Equity (D/E) ratio is a financial metric that shows the liquidity of the company. It indicates the degree of financial leverage a company is using to finance its operations. The D/E ratio is calculated by dividing total debt by total equity.

6. Price-to-Earnings Ratio

Price-to-Earnings Ratio = (Market Price per Share / Earnings per Share)

Price-to-Earnings Ratio (PE) is a financial ratio used to evaluate a company’s valuation by comparing its current share price to its earnings per share (EPS). It gives an idea of how much investors are willing to pay for each dollar of earnings generated by the company. It is calculated by dividing the market price by earnings.

7. Dividend Yield

Dividend Yield = (Dividend per Share / Market Price per Share) * 100%

Dividend Yield is a financial metric used to identify how much dividend income they get as investors compared to the market price of the share. The higher the dividend yield indicates that it is a good investment to hold. It is calculated by dividing the dividend per share by the market price.

8. Dividend Payout

Dividend Payout = (Dividend per Share / Earnings per Share) * 100%

Dividend Payout is a financial ratio that indicates how much percentage of earnings is used to pay the dividends. After giving as dividends the company left some portion of their earnings to expand their business. So, it so important to pay enough dividend payout as well as keep enough portion to expand.