Financial ratios

Gross Profit vs Gross Margin: Key Differences Understand the key difference between gross profit and gross margin, and why comparing percentages matters more than raw dollars when sizing companies.

High Gearing vs Low Gearing: What Each Signals What high versus low gearing ratios imply for financial risk, return potential, and flexibility, calibrated by industry norms.

How Financial Leverage Affects Return on Equity How does leverage affect return on equity—the debt multiplier effect that can amplify shareholder returns in good times and destroy them during downturns.

How Inventory Affects the Current Ratio Understand how inventory values and changes inflate or deflate the current ratio, and why analysts use the quick ratio to strip it out.

How Lenders Use Efficiency Ratios to Assess Borrowers Lenders scrutinize Days Sales Outstanding, inventory turnover, and asset turnover to judge whether a borrower can generate enough cash to repay debt, and to forecast covenant compliance.

How Mezzanine Debt Affects a Company's Leverage Ratios Understand where mezzanine debt sits in the capital stack and how it impacts solvency metrics and leverage ratios.

How to Annualize Volatility from Daily Returns Annualize daily volatility by multiplying by the square root of 252 trading days per year. The square-root-of-time rule assumes independent returns, which markets violate in crises.

How to Calculate Portfolio Beta with an Example Calculate portfolio beta by weighting individual asset betas by their portfolio proportion; includes a worked numerical example.

How to Calculate the Solvency Ratio Step-by-step guide to calculating the solvency ratio using after-tax net income plus non-cash charges divided by total liabilities.

How to Compare Financial Ratios Across Industries Method for comparing financial ratios across industries: group by peer sector, adjust for business model, avoid universal benchmarks.

How to Improve a Company's Current Ratio Concrete actions to improve current ratio: accelerate receivables collection, reduce inventory, refinance debt, and boost operating cash flow to strengthen short-term liquidity.

How to Improve Asset Turnover Ratio Actions to improve asset turnover ratio: pricing power, asset divestitures, and lease-vs-buy decisions that management uses to raise efficiency.

How to Improve Days Payable Outstanding How to improve days payable outstanding: supply-chain finance, renegotiated terms, and the trade-offs between working-capital efficiency and vendor relationships.

How to Interpret a Negative Debt-to-Equity Ratio A negative debt-to-equity ratio can signal either negative equity (financial distress) or a net-cash position (financial strength). Learn what each means.

How to Reduce a Company's Debt-to-Equity Ratio How companies lower their debt-to-equity ratio through retained earnings, debt repayment, equity issuance, and operational improvements.

How to Reduce Days Sales Outstanding Step-by-step methods to reduce days sales outstanding (DSO) including credit policy, collections, early-payment incentives, and invoicing speed.

How to Shorten the Cash Conversion Cycle Three levers for reducing cash conversion cycle: lower inventory days, reduce customer payment time, and extend supplier payment terms.

Idiosyncratic Risk vs Systematic Risk Idiosyncratic risk is company-specific and diversifiable; systematic risk is market-wide and cannot be eliminated through diversification.

Incremental Operating Margin The change in operating profit divided by incremental revenue, showing how much bottom-line leverage each new sales dollar generates.

Information Ratio A risk-adjusted measure of how consistently a portfolio manager generates excess returns relative to a benchmark.

Information Ratio vs Sharpe Ratio Information ratio measures active-management skill relative to tracking error; Sharpe measures overall risk-adjusted returns. Both reward skill but answer different questions.

Interest Coverage Ratio The interest coverage ratio divides operating income (EBIT) by interest expense, measuring whether a company generates enough profit to pay its interest obligations comfortably.

Interest Coverage Ratio Explained Learn how interest coverage ratio measures debt-servicing ability using EBIT and interest expense. Understand minimum thresholds and how it differs from DSCR.

Interest Coverage Ratio for Startups and Pre-Profit Companies Why standard interest coverage fails for unprofitable startups and what alternative metrics lenders use to assess debt capacity.

Interest Coverage Ratio vs Debt Service Coverage Ratio How interest coverage and debt service coverage differ in measuring solvency; when lenders prefer one metric over the other.

Interest Coverage Ratio: What Is a Safe Minimum? Understand the safe minimum interest coverage ratio by industry, what lenders and bondholders require, and what falling below 1.5x signals.

Interval Measure Estimates how many days a firm can operate using only its liquid assets, without relying on new revenue.

Intrinsic Value-to-Market Price The ratio of a stock's estimated true value to its current market price. Used to measure whether a stock is cheap, fair, or expensive.

Inventory Days vs Days Sales in Inventory: Are They the Same? Inventory days and days sales in inventory are nearly identical metrics—both measure how long inventory sits before sale. But one formula uses COGS and the other uses sales, producing different numbers.

Inventory Days vs Inventory Turnover: Choosing the Right Metric Inventory turnover ratio and days inventory outstanding are inversely related metrics. One measures frequency; the other measures duration. Learn which reveals operational performance.

Inventory to Net Working Capital Ratio A liquidity metric measuring the percentage of net working capital committed to inventory, signalling overstock risk and asset tie-up.

Inventory Turnover Inventory turnover divides cost of goods sold by average inventory, measuring how many times per year a company sells and replaces its inventory.

Inventory Turnover by Industry: Benchmarks and What They Mean A good inventory turnover ratio varies by industry. Grocery stores turn 8–12x yearly; aerospace 1–2x. Learn how to benchmark against true peers.

Inventory Turnover Ratio A measure of how quickly a company sells and replaces its stock, revealing operational efficiency and demand health relative to peers.

Inventory Turnover Too High: What It Signals High inventory turnover isn't always good. Learn why excessive turnover can signal stockout risk, lost sales, supply chain stress, and hidden inefficiency.

Inventory-to-Sales Ratio The ratio of inventory levels to sales revenue; a leading indicator of demand weakness and operational efficiency that reveals whether stock is accumulating relative to sell-through.

Justified P/E Ratio The theoretically warranted price-to-earnings multiple derived from a dividend discount model or other fundamental valuation framework; used to identify whether a stock is overvalued or undervalued relative to its growth and risk profile.

Key Financial Ratios for Retail Industry Analysis Essential financial ratios for retail industry analysis: inventory turnover, gross margin, same-store sales, and leverage metrics for evaluating retailers.

Kurtosis and Fat-Tail Risk in a Portfolio Excess kurtosis measures tail-event frequency in return distributions; it reveals hidden portfolio risk that standard deviation alone cannot capture.

Labour Productivity Ratio Revenue or value-added per employee; a measure of how efficiently human capital generates economic output.

Leverage Ratio (Basel III) The Tier 1 capital to total exposure measure that caps bank balance-sheet leverage independent of risk weights, a non-risk-weighted backstop introduced by Basel III.

Leverage Ratio for Banks Explained The Tier 1 leverage ratio for banks uses unweighted assets to measure solvency, unlike corporate leverage ratios that adjust for risk.

Liquidity Coverage Ratio Basel III regulatory metric requiring banks to hold high-quality liquid assets sufficient to cover 30-day net cash outflows.

Liquidity Coverage Ratio for Non-Bank Companies The Liquidity Coverage Ratio, adapted from Basel III bank rules, helps non-bank companies measure whether they can survive 30 days of stressed cash outflows using only liquid assets.

Liquidity Ratio vs Solvency Ratio Understand the difference between liquidity ratios, which measure short-term cash availability, and solvency ratios, which assess long-term debt repayment capacity.

Liquidity Ratios for Banks: LCR and Beyond Explore bank-specific liquidity ratios including the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), and regulatory stress-test metrics that assess banking system resilience.

Liquidity Ratios for Real Estate Companies: Special Considerations Liquidity ratios are a poor fit for REITs and property companies; analysts use cash-flow coverage and asset-sale capacity instead.

Liquidity Ratios for Startups: Which Metrics Actually Matter Learn why traditional liquidity ratios for startups are misleading and which metrics—cash runway and burn rate—actually predict survival.

Long-Term Debt to Capitalization Ratio A solvency metric showing the share of long-term debt in a company's permanent capital structure, key to credit analysis and leverage assessment.

Long-Term Debt to Equity Ratio Measures long-term debt against shareholder equity to assess structural solvency risk independent of short-term obligations.

Low Inventory Turnover: Causes and Warning Signs Why inventory turnover declines and how to identify whether slowing sales, poor demand forecasting, or structural problems are behind it.

Marginal Profit Margin Marginal profit margin meaning explained. The profit earned on each additional dollar of revenue, distinct from average margin and linked to operating leverage.

Market capitalization Market capitalization (market cap) is the total market value of a company's outstanding shares, calculated as share price times share count. It is the most useful single measure of a company's size and the basis for market-cap-weighted indices.

Market-Cap-to-GDP Ratio Market-cap-to-GDP ratio, aka the Buffett Indicator, divides total stock market value by GDP to assess if stocks are expensive or cheap at a macro level.

Market-to-Replacement-Cost Ratio The equity market capitalisation divided by the estimated cost to physically rebuild the firm's asset base; signals whether investors value the business above or below its tangible, reconstructed worth.

Maximum Drawdown The largest peak-to-trough percentage decline in the value of an investment or portfolio over a specific period.

Maximum Drawdown Recovery Time Explained Maximum drawdown recovery time measures how long it takes to regain losses from a portfolio's steepest peak-to-trough decline, separating painful drawdowns from permanent damage.

Maximum Drawdown vs Volatility as Risk Measures Maximum drawdown captures worst peak-to-trough loss; volatility measures symmetric dispersion. Each reveals different aspects of portfolio risk and time-sequence effects.

Modigliani Risk-Adjusted Performance A portfolio's return rescaled to match the benchmark's volatility, producing a directly comparable percentage return independent of the fund's actual risk level.

NAV Premium and Discount Why closed-end funds and investment trusts trade above or below their net asset value per share.