Business studies
Financial ratios calculator
Pick the ratio, enter the two balance-sheet figures and get the value, with a clear statement of what belongs on top and what belongs underneath — which is where it goes wrong.
What each ratio measures
The profitability ratios answer the same question from three angles. ROE looks at it from the owners' side: how much net profit each unit of equity produces. ROI looks at the company as an operating machine, putting operating profit over invested capital, unaffected by how that capital was raised. ROS drops to the income statement and says how much operating profit is left per unit of sales.
Gearing links the first two. If ROI exceeds the cost of borrowed money, taking on debt raises ROE: the company earns more on other people's capital than it pays for it. If ROI falls below that cost, the leverage works in reverse and amplifies the losses. That is why gearing has no universally good level — it depends entirely on the relationship between ROI and the cost of debt.
The liquidity ratios change horizon and look at the next twelve months. The current ratio compares current assets with current liabilities, and a value above 1 means the resources coming in cover the debts falling due. The quick ratio strips inventory out of the numerator, because stock is the item that liquidates worst and slowest in a crisis.
Common mistakes
- Putting net profit on top of ROI: ROI uses operating profit, the result before interest and tax. With net profit you get a different ratio, and in a geared company the gap is large.
- Comparing ratios across sectors: a current ratio of 1.2 is normal in grocery retail, which takes cash and pays at 90 days, and worrying in manufacturing.
- Reading a single year: one ratio on its own says little. It is the trend over three or four years that shows whether things are improving.
Frequently asked questions
How do you calculate ROE?
ROE = net profit / shareholders' equity × 100. A profit of 45,000 on equity of 300,000 gives an ROE of 15%.
What is the difference between ROI and ROE?
ROI measures the return on all invested capital using operating profit; ROE measures the return on owners' capital alone using net profit. The first judges the business, the second the return to shareholders.
What separates the quick ratio from the current ratio?
The quick ratio excludes inventory from current assets. It is the stricter measure, because stock takes the longest to turn into cash.
What are acceptable benchmark values?
As a very rough guide: current ratio above 1.5, quick ratio around 1, ROE above 10% and ROI above 8%. These are conventions that must always be read against the sector and the company's own history.
How this calculation works
ROE = net profit / shareholders' equity × 100. ROI = operating profit / invested capital × 100. ROS = operating profit / sales revenue × 100. Gearing = invested capital / shareholders' equity. Current ratio = current assets / current liabilities. Quick ratio = (current assets − inventory) / current liabilities. Debt-to-equity = financial debt / shareholders' equity. Relationship between them: ROE = ROI × gearing × the effect of non-operating items, which is the leverage effect — borrowing raises ROE for as long as ROI stays above the cost of debt.
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