Whether you’re a novice looking to get a better grasp of the financial world or a seasoned professional seeking a quick refresher, this guide has something for everyone. Let’s break down these crucial equations to help you navigate the financial landscape
Understanding these formulas will not only help you decode complex investment and accounting terms, but also empower you to make informed decisions. Think of this as your ultimate financial cheat sheet, designed to demystify the numbers and concepts that drive business and investment strategies.
Financial Analysis Formulas:
Current Ratio: The current ratio is a measure of a business’s ability to pay its short-term obligations. It’s calculated as Current Ratio = Current Assets / Current Liabilities.
Debt to Equity Ratio: Debt to equity ratio is a common measure of financial leverage. A high debt to equity ratio means that a company uses debt to finance its growth. It’s calculated as Debt-to-Equity Ratio = Total Liabilities / Total Equity.
Gross Profit: Gross profit is the amount by which revenue exceeds the cost of goods sold (or cost of sales). It’s calculated as Gross Profit = Net Revenue – Cost of Goods Sold.
Gross Margin: Gross margin is used as a measure of profitability. Calculating it yields the percentage of revenue left to cover other expenses after the cost of goods sold is subtracted. It’s calculated as Gross Margin = Gross Profit / Revenue and expressed as a percentage.
Net Income: Net income (or net profit) is a company’s total earnings (or profit). It’s calculated as Net Income = Total Revenue – Total Expenses.
Net Margin: Net margin (or net profit margin) is a company’s ratio of net profit to revenue. It’s calculated as Net Margin = Net Profit / Revenue and expressed as a percentage.
Quick Ratio: The quick ratio is a measure of a business’s ability to pay its short-term obligations. While the current ratio measures the same thing, the quick ratio is a more stringent test. It’s calculated as Quick Ratio = (Current Assets – Current Inventory) / Current Liabilities.
Return on Investment (ROI): Return on investment is used to determine the expected return of a project or activity compared to the cost of the investment—typically shown as a percentage. This measure is often used to evaluate whether a project is worthwhile for a business to pursue. It’s calculated as ROI = [(Income – Cost) / Cost] x 100.
Working Capital: Also known as net working capital, this is the difference between a company’s current assets and current liabilities. Working capital—the money available for daily operations—can help determine an organization’s operational efficiency and short-term financial health. It’s calculated as Working Capital = Current Assets – Current Liabilities.
