Although a simple measure, financial ratios aid in tracking a company’s performance, comparing its performance with historical one and that of competitors. Financial analysts, creditors, management team, employees and regulatory authorities can benefit from regularly checking in on the company’s financial performance. The numbers used to calculate them are mostly taken from a company’s financial statements. Take a look at the most popular ones that we have gathered in this blog post!
LIQUIDITY RATIOS
Current Ratio
Will we have enough money to pay suppliers?

Benchmark: at least 1.00, preferably 2.00
Quick Ratio
Will we be able to pay our suppliers in the near future?

Benchmark: 0.5 – 1.00
Absolute Liquidity Ratio
How much of our suppliers’ debts will we be able to cover with the funds in the account?

Benchmark: 0.05 – 0.20
Do not include such items in your calculations:
- short-term loans from owners,
- payments of the next period,
- unpaid dividends,
- short-term loans to owners,
- liabilities for unused leave, etc.
BUSINESS ACTIVITY RATIOS
Debtor Days
How quickly do our debtors pay usafter the transaction?

Inventory Days
How much of our suppliers’ debts will we be able to cover with the funds in the account?

Creditor Days
How long do our suppliers allow them to not pay for stocks after purchasing them?

Cash Conversion Cycle
How long is cash tied up in inventory before the inventory is sold and cash is collected from customers?

- To calculate average receivables or stocks, the average between the year-start and year-end balance sheets is used. Accordingly, these indicators are significantly affected by the closing balance! It is worth following them every month in your company.
- Turnover’s cost of sales is not equal to production cost – the cost of purchasing and delivering items must be taken into account.
- Accounts payable should only be used for trade receivables. Depending on the situation, the bank’s short-term liabilities, which are taken directly to finance inventories, can be used.
- All turnover figures are measurable in days.
BUSINESS ACTIVITY RATIOS
Average Markup
What is the average transaction markup for this company?

Gross Margin
How many percent remain in circulation after covering all production costs?

EBITDA Margin
How many percent remain in circulation after covering all operating costs?

Net Margin
How many percent remain in circulation after covering all costs?

Return on Assets
How profitable are the total assets in the company?

Return on Equity
How profitable is the owners’ investment in the company?

All averages are measured as the average between the beginning and the end of the year. The calculation of equity should also include owner loans to the company, unpaid dividends, deferred CIT, provisions, etc.
CAPITAL STRUCTURE RATIOS
Equity Ratio
Do we have enough of our own money in the company?

Benchmark: >20%
Comparison rate
This is worth calculating only for competitors – what could be their interest rate in the bank? You know your own % rate from credit agreements.

Debt-Service Coverage Ratio (DSCR)
Do we earn more than we have to pay the bank?

Benchmark: >120%
Debt/EBITDA
In how many years would the company be able to return all its loans to the bank?

Benchmark: <4.00, more for long-term real estate projects
To calculate the average balance sheet ratios (assets, loan balances), the average between the beginning and the end of the year balance sheet is used. Accordingly, these figures are affected by the closing balance (but not as significant as receivables, inventories or trade receivables)! It is worth following them every month in your company.
EBITDA = earnings before interest, taxes, depreciation and amortization
EBITDA = net profit + CIT + % payments + depreciation + amortization
ALTMAN Z-SCORE
z-Score
What is the probability of bankruptcy of the company?
Z=1.2A+1.4B+3.3C+0.6D+1.0E
Z <1.8. Very high probability of bankruptcy in the near future
1.8 < Z <2.7. Moderate probability of bankruptcy in the next 2 years
Z > 2.7. Minimal probability of bankruptcy in the next 2 years
A. Proportion of working capital

Share of working capital in assets
B. Proportion of retained earnings

Proportion of retained earnings in assets
C. EBIT Yield

EBIT to asset ratio
D. Equity versus liabilities

Equity to liabilities ratio
E. Movement of assets

Asset turnover ratio