A plain-English guide to every ratio

Margins and profitability

Margins answer the same basic question at different points on the income statement: of every dollar this company brings in, how much does it actually keep? Reading the three margins below together, in order, usually tells you more than any one of them alone -- where the gap between gross and operating margin is wide, for instance, that's R&D and sales & marketing spend doing the work, not a weak core business.

Gross margin Plus

Gross profit ÷ revenue (latest quarter)

What's left after the direct cost of producing what was sold, as a share of revenue. Software and services businesses tend to run very high here since there's little marginal cost to serving one more customer; retailers and manufacturers run much lower as a matter of course. A "low" gross margin isn't automatically a bad sign -- it depends entirely on what kind of business you're looking at.

Operating margin Plus

Operating income ÷ revenue (latest quarter)

Profit after all the normal costs of running the business -- R&D, sales, marketing, overhead -- but before interest and taxes. This is usually the cleanest single read on how efficiently a company runs its core operations, since it excludes financing decisions (how much debt it carries) and tax situations that can vary company to company for reasons that have nothing to do with operating performance.

Net margin Plus

Net income ÷ revenue (latest quarter)

What's actually left for shareholders after everything -- interest, taxes, one-time items -- as a share of revenue. It's the most commonly quoted margin, but also the noisiest quarter to quarter, since it picks up things like asset sales, legal settlements, and tax law changes that don't reflect the ongoing business.

Net margin (TTM) Pro

Trailing 12mo net income ÷ trailing 12mo revenue

The same idea as net margin, but smoothed across the trailing four quarters instead of just the latest one. Trailing-twelve-month ratios exist specifically to wash out one quarter's noise -- a seasonal slow quarter, a one-time charge -- so this is usually a steadier read than the single-quarter version above.

EBITDA margin Pro

(Trailing 12mo operating income + D&A) ÷ trailing 12mo revenue

Operating margin with depreciation and amortization added back in -- a rough proxy for cash profitability before the effects of past capital spending decisions. It's popular for comparing companies with very different asset bases (a lot of owned equipment and buildings versus very little), though it's also easy to overuse: D&A reflects real capital that was actually spent, even if it isn't a cash cost this quarter.

Returns on capital

Margins measure profitability against revenue. Returns measure it against the capital it took to generate that profit -- which is the more complete picture, since two companies with identical margins can be very different investments if one needs twice as much capital to produce them.

Return on assets (TTM) Plus

Trailing 12mo net income ÷ total assets

How much profit a company generates per dollar of assets it owns or controls, regardless of how those assets were financed (debt or equity). Asset-heavy businesses -- utilities, industrials, banks -- tend to run low ROA as a structural fact of the business, not necessarily a sign of poor management.

Return on equity (TTM) Plus

Trailing 12mo net income ÷ stockholders' equity

How much profit a company generates per dollar shareholders have invested. Unlike ROA, this one rewards leverage: borrowing money to fund growth boosts ROE even if the underlying business hasn't gotten any more efficient, which is exactly what the DuPont decomposition below is built to separate out.

Asset turnover Pro

Trailing 12mo revenue ÷ average total assets

How much revenue a company generates per dollar of assets -- the "efficiency" leg of the DuPont breakdown. Retailers and grocers typically post asset turnover well above 1x since they don't need much in the way of owned assets to sell what they sell; capital-intensive businesses like software or utilities run well under 1x as a structural fact, not a sign of poor management.

Equity multiplier Pro

Average total assets ÷ average stockholders' equity

A direct read on leverage: how many dollars of assets a company controls for every dollar of shareholder equity backing them. A multiplier of 1x would mean no debt at all; higher numbers mean more of the balance sheet is funded by liabilities rather than equity. This is the piece of ROE that has nothing to do with how well the underlying business runs.

ROE (DuPont decomposition) Pro

Net margin (TTM) × asset turnover × equity multiplier

Return on equity broken into the three things that actually drive it: how profitable each sale is, how efficiently assets are used to generate sales, and how much leverage is applied on top. Two companies can post the same headline ROE for completely different reasons -- one earning it through genuine operating efficiency, another mostly through debt -- and this is the ratio that tells you which is which.

Liquidity and leverage

These ask a narrower question than margins or returns: could this company cover what it owes, and how much of its balance sheet is funded by debt versus equity? A business can be highly profitable and still run into trouble if it can't meet near-term obligations -- these ratios are the check for that.

Current ratio Plus

Current assets ÷ current liabilities

Assets expected to convert to cash within a year, divided by liabilities coming due within a year. Above 1x generally means a company can cover its near-term obligations from near-term assets alone; below 1x isn't automatically alarming -- subscription businesses, for instance, often carry large deferred-revenue balances as a current liability that represents work still owed, not cash they don't have.

Quick ratio (acid-test) Plus

(Current assets − inventory) ÷ current liabilities

The current ratio with inventory stripped out, since inventory is the current asset furthest from actually being cash -- it still has to be sold first. This matters most for businesses that carry real inventory (retailers, manufacturers); for a company with little or none, quick ratio and current ratio will land close to identical.

Cash ratio Plus

Cash & equivalents ÷ current liabilities

The strictest liquidity test: could this company cover its near-term liabilities with cash on hand alone, with no help from receivables or inventory. A low cash ratio isn't a red flag by itself -- most healthy companies keep cash working rather than sitting idle -- but it's the number to check first if a company's current or quick ratio looks weak.

Working capital Plus

Current assets − current liabilities

The current ratio's dollar-amount cousin: the actual cushion, in dollars, between what's coming due and what's available to cover it. Useful alongside the current ratio because it shows scale -- a current ratio just under 1x means something very different for a company with a few million dollars in current liabilities than one with tens of billions.

Debt / equity Plus

Total liabilities ÷ stockholders' equity

How much the company owes relative to what shareholders have invested. Higher leverage magnifies returns in good years and losses in bad ones, and what counts as "normal" varies enormously by industry -- capital-light software companies often run near zero, while banks and utilities routinely run well above 1x as a normal feature of how those businesses are financed.

Debt / assets Plus

Total liabilities ÷ total assets

The same leverage question as debt/equity, expressed as a share of the whole balance sheet instead of relative to equity alone. The two usually move together, but debt/assets is a bit more intuitive to read at a glance: it's simply what fraction of everything the company owns is financed by debt rather than shareholders.

Book value / share Plus

Stockholders' equity ÷ shares outstanding

What each share would theoretically be worth if the company sold every asset, paid off every liability, and split the remainder evenly among shareholders. It rarely matches the actual stock price -- the market is pricing in future growth and earnings power that book value doesn't capture at all -- but it's a useful floor-level reference, especially for asset-heavy businesses like banks and insurers.

Interest coverage Pro

Trailing 12mo operating income ÷ trailing 12mo interest expense

How many times over a company's operating income could cover its interest payments. A ratio comfortably above 1x means debt service isn't a near-term concern; a ratio near or below 1x means operating income barely covers (or doesn't cover) interest costs, which is worth a closer look regardless of how healthy the rest of the balance sheet looks.

Efficiency and the cash conversion cycle

These measure how fast a company turns its operating activities -- selling inventory, collecting from customers, paying suppliers -- into cash. They only apply to businesses that actually carry inventory and receivables in the way manufacturers and retailers do; a company with no inventory to speak of (most software businesses, for instance) will correctly show a dash on the inventory-related ratios rather than a number, since the concept doesn't apply.

Inventory turnover Pro

Trailing 12mo cost of goods sold ÷ average inventory

How many times a company sells through its entire inventory balance over a year. Higher generally means inventory isn't sitting around tying up cash -- though what's "normal" varies widely, from grocers turning inventory over dozens of times a year to aircraft manufacturers turning it over just a few times.

Receivables turnover Pro

Trailing 12mo revenue ÷ average accounts receivable

How many times a company collects its full receivables balance over a year -- in other words, how quickly it gets paid by its customers after a sale. Higher means faster collection, which generally means better cash flow relative to the revenue being reported.

Days sales outstanding Pro

365 ÷ receivables turnover

Receivables turnover restated in days instead of "times per year," which is usually the more intuitive way to read it: the average number of days it takes a company to collect cash after a sale.

Payables turnover Pro

Trailing 12mo cost of goods sold ÷ average accounts payable

How many times a company pays off its full accounts-payable balance over a year -- the mirror image of receivables turnover, but for what the company owes its own suppliers rather than what it's owed by customers.

Days payable outstanding Pro

365 ÷ payables turnover

Payables turnover restated in days: the average number of days a company takes to pay its own suppliers. A longer number here isn't automatically bad -- stretching payables is a normal way to hold onto cash longer -- but a sudden, sharp increase can also signal a company that's starting to struggle to pay its bills on time.

Days inventory outstanding Pro

365 ÷ inventory turnover

Inventory turnover restated in days: on average, how long inventory sits before it's sold. Shorter generally means less cash tied up on the shelf, though the "right" number depends heavily on what's being sold -- fresh groceries and heavy machinery have very different natural cycles.

Cash conversion cycle Pro

Days inventory outstanding + days sales outstanding − days payable outstanding

The headline number the three "days" ratios above feed into: the number of days between paying cash out to suppliers and collecting cash in from customers. Lower is generally better, since it means less cash is tied up in the operating cycle at any given time -- and a negative cash conversion cycle, which shows up for some retailers and subscription businesses, means a company is collecting from customers before it even has to pay its own suppliers.