Financial ratios

Twelve ratios in four families (profitability, structure, liquidity, turnover): their formula, their usual benchmark and the reader they speak to.

The outline, topic by topic

Each topic is weighted the way the exam weighs it.

Net margin: what is it?
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Net income divided by sales excluding VAT: the share of each euro sold that stays with the owners.
Its normal level depends on the sector: a retailer lives on small margins and large volumes, a software publisher on high margins.
Net income €30,000, equity €120,000, sales €600,000, balance sheet total €150,000. What is the return on equity?
- 25 %
- 20 %
- 5 %
- 400 %
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25 %
30,000 ÷ 120,000 = 25%. 20% divides by the balance sheet total, 5% by sales (that is net margin), 400% inverts the fraction.
Quick ratio = (… + cash) ÷ short-term debts: it leaves out …, which is harder to turn into cash quickly.
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Quick ratio = (receivables + cash) ÷ short-term debts: it leaves out stock, which is harder to turn into cash quickly.
Stock may take months to sell, or lose value. The usual benchmark is a ratio close to 1.
Return on capital employed: what is it?
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Operating income divided by capital employed (equity and financial debt): what the production assets earn, however they are financed.
It judges the production assets regardless of how they are financed: an indebted company and a debt-free one can be compared on it.