Financial ratios

Rule of 40 as a Valuation Benchmark Rule of 40 valuation: a SaaS benchmark where revenue growth rate plus profit margin should exceed 40% to justify a high price-to-sales multiple.

Rule of 40 for SaaS Companies Rule of 40 SaaS profitability metric: revenue growth rate plus net profit margin should equal at least 40. Learn when to prioritize growth versus margin.

Sales per Square Foot: Retail Space Efficiency Ratio Sales per square foot measures retail efficiency by dividing annual sales revenue by store floor area—a critical metric for evaluating real estate productivity and comparable store performance.

Sales to Net Working Capital Ratio Metric that measures how efficiently a company converts its short-term capital base into revenue generation.

Semi-Variance as a Downside Risk Measure Semi-variance captures downside risk by measuring only negative returns below a target, offering loss-averse investors a more realistic picture than full variance.

Senior Debt to EBITDA A covenant metric in syndicated lending that measures only secured, priority-ranking debt against operating profit, excluding subordinated obligations.

SG&A to Revenue Selling, general and administrative expense burden as a percentage of revenue, indicating operational efficiency.

SG&A-to-Revenue Ratio: Measuring Overhead Efficiency The SG&A-to-revenue ratio measures overhead efficiency by dividing selling, general, and administrative expenses by total revenue. Industry norms reveal cost discipline and scalability.

Sharpe Ratio A measure of risk-adjusted returns that divides excess return by total volatility to assess portfolio efficiency.

Sharpe Ratio Small-Sample Bias Explained Small-sample Sharpe ratios overstate risk-adjusted returns. Learn why short track records mislead and how to apply finite-sample corrections.

Sharpe Ratio vs Sortino Ratio: Key Differences Compare Sharpe and Sortino ratios: Sharpe penalizes all volatility, while Sortino focuses on downside risk, essential when returns are skewed.

Shiller CAPE Ratio A long-term valuation metric that divides price by the average inflation-adjusted earnings of the past decade, smoothing business-cycle distortions.

Skewness in Return Distributions and What It Signals Understand positive vs negative skew in asset returns and why negative skew signals dangerous portfolio drawdown risk.

Slow-Moving Inventory Ratio: Definition and Write-Down Risk Slow-moving inventory ratio definition: identifies inventory with low turnover that signals write-down risk before it hits income statements.

Solvency Ratio A measure of a company's ability to meet long-term obligations, calculated as total assets relative to total liabilities.

Solvency Ratio (Insurance) Measures an insurer's net income plus depreciation against total liabilities to gauge ability to meet long-term policyholder obligations.

Solvency Ratio vs Liquidity Ratio: Understanding the Difference Solvency ratios measure long-term debt repayment ability; liquidity ratios measure short-term cash availability. A firm can be liquid but insolvent—or insolvent but temporarily liquid.

Sortino Ratio A risk-adjusted return metric that penalizes only downside volatility, not upside gains.

Sortino Ratio for Retirees: Why Downside Risk Matters More Sortino ratio for retirees explained: why focusing on downside deviation instead of total volatility matters when withdrawing from a portfolio.

Static vs Dynamic Liquidity Ratios Understand the difference between static liquidity ratios (current, quick) based on balance sheets and dynamic ratios (cash flow, operating cash flow) that reveal true short-term payment ability.

Sterling Ratio A risk-adjusted return metric that divides annualized return by the average annual maximum drawdown, extending the Calmar concept to multi-year fund evaluation.

Stock-Based Compensation and Its Effect on Profit Margins Tech companies report different GAAP vs non-GAAP margins because stock-based compensation is expensed under GAAP but excluded from adjusted earnings. Understanding the trade-offs matters for valuation.

Stress Testing vs Value at Risk Stress testing and value at risk are complementary risk frameworks. VaR predicts typical losses; stress tests model extreme scenarios regulators demand both.

Super-Quick Ratio An extreme liquidity test that counts only cash and marketable securities against current liabilities, stripping away all assumptions about asset conversion.

Sustainable Growth Rate The rate at which a company can grow using only retained earnings, without raising additional external capital or changing its capital structure.

Tail Risk vs Volatility: Key Differences Why standard deviation misses extreme losses, and how tail risk measures like CVaR and the Ulcer Index capture the danger lurking in fat-tailed return distributions.

Tangible Book Value Per Share The book value of a company divided by shares outstanding, excluding intangible assets like goodwill and patents.

Tangible Net Worth Ratio A solvency measure that divides tangible equity (total assets minus intangibles and goodwill) by total liabilities, testing whether a firm can cover its obligations with hard assets alone.

The PEG Ratio Growth Trap: When a Low PEG Is Misleading Understand when a low PEG ratio is misleading—when growth forecasts are unreliable or earnings are cyclically inflated.

Theta (Option Greeks) Time decay of an option's premium as it approaches expiration; the daily loss an option holder faces simply from the passage of time.

Times Interest Earned Ratio A solvency metric comparing operating earnings to annual interest expense, showing how many times a company can cover interest from operations.

Tobin's Q Ratio The economist James Tobin's measure of market value relative to replacement cost of assets, used to signal whether firms (or markets) are overinvesting or underinvesting.

Total Asset Turnover A ratio measuring how much revenue a company generates for each dollar of assets—current and long-term—deployed on its balance sheet.

Total Debt Service Ratio A solvency metric that measures an entity's ability to service all contractual debt obligations, including principal, interest, and lease payments, as a percentage of cash flow.

Total Liabilities to Equity Ratio A leverage metric comparing all company obligations—current and long-term—against shareholders' equity to measure financial risk.

Tracking Error vs. Systematic Risk Portfolio variance from index versus market beta exposure; two measures of risk with different implications for active management.

Trailing PEG Ratio The price-to-earnings-to-growth ratio calculated using historical earnings growth rather than forecast growth, eliminating analyst bias and offering a backward-looking check on valuation.

Treynor Ratio A risk-adjusted return metric that divides excess return by beta to measure systematic-risk efficiency.

Treynor Ratio vs Sharpe Ratio Compare Treynor ratio (excess return per systematic risk) and Sharpe ratio (excess return per total volatility) to understand when each applies.

Ulcer Index A risk metric that measures the depth and duration of drawdowns, penalizing prolonged periods below previous highs rather than just the magnitude of the largest loss.

Up-Capture Ratio A fund's return during periods when the benchmark is positive, expressed as a percentage of the benchmark's own gain—showing whether the manager participates in rallies.

Value at Risk vs Conditional Value at Risk Understand VaR as a loss threshold and CVaR (expected shortfall) as the average loss beyond it—and why regulators prefer CVaR for bank stress testing.

Value-to-Book Ratio The relationship between market value (stock price times shares) and book value (assets minus liabilities). Used to assess whether a company is valued above or below its accounting net worth.

VaR at 95% vs 99% Confidence: What the Difference Means Compare 95% and 99% confidence level Value at Risk: tail risk capture, regulatory requirements, and practical interpretation for portfolio risk.

Variance Ratio Test A statistical test comparing return variance across different holding periods to detect deviations from random walk behavior, exposing momentum and mean reversion.

Vega (Option Greeks) The sensitivity of an option's price to changes in underlying asset volatility, measuring the rate of price change per 1% change in volatility.

Volatility-Beta Relationship How stock volatility relates to systematic risk exposure, measured by beta and reflected in expected returns.

What a Negative Cash Conversion Cycle Means How a negative cash conversion cycle lets companies collect cash before paying suppliers—and when this competitive advantage becomes a warning sign.

What a Negative Sharpe Ratio Means Understand negative Sharpe ratios: when a fund underperforms risk-free assets, its risk-adjusted return is negative, making comparison tricky.

What an Interest Coverage Ratio Below 1 Means An interest coverage ratio below 1 signals severe financial distress—the company's earnings don't cover interest payments. Learn what causes it and how long firms survive.

What Happens to a Company's Leverage Ratio During a Recession Learn why leverage ratios rise during downturns due to falling EBITDA, asset write-downs, and credit line drawdowns, and how analysts adjust for cyclicality.

What Happens When Days Sales Outstanding Is Too High A rising DSO signals collection delays that impair cash flow and credit quality. Learn the consequences and thresholds that reveal a collections problem.

What Low vs High R-Squared Means for a Portfolio Low R-squared means a portfolio's returns are not explained by its benchmark, making beta and alpha statistics unreliable. High R-squared means the benchmark captures the fund's behavior.

When a High Cash Ratio Is a Warning Sign A high cash ratio can signal idle capital and weak reinvestment strategy, not financial strength. Learn when excess cash is a red flag.

Why Price-to-Book Ratio Is Less Useful for Tech Companies Price-to-book ratio for technology companies: why intangible assets and expensed R&D inflate P/B, making it a poor standalone valuation metric in tech.

Why the Information Ratio Is Zero for Passive Index Funds Information ratio for passive index funds is zero by design: perfect tracking means zero tracking error, making the ratio undefined or zero—revealing fundamental truths about active vs passive.

Working Capital Efficiency Measurement of how effectively a firm converts current assets and liabilities into sales and profit.

Working Capital Ratio Working capital ratio divides current assets by current liabilities, identical to the current ratio, measuring short-term financial health.

Working Capital Ratio for Small Businesses Working capital ratio for small businesses: manage tight credit and seasonal cash swings without access to capital markets that large firms enjoy.

Working Capital to Sales Ratio: How to Calculate and Use It Working capital to sales ratio measures how much net working capital a company ties up per dollar of revenue, revealing liquidity efficiency relative to business scale.