Financial Ratios

20 concepts in this category.

• P/E Ratio

  Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.

• P/B Ratio

  If a company owns $10 of net assets per share and the stock costs $15, the P/B is 1.5. Below 1 can mean you're paying less than the accounting value of what the company owns — though it can also mean the market expects those assets to lose value or earn poor returns.

• P/S Ratio

  How much you're paying for each dollar of revenue a company brings in. A company with a $10B market cap and $2B in annual revenue trades at a P/S of 5 — you're paying $5 for every $1 of sales. It's most useful when there's no meaningful P/E to look at, because earnings are negative or barely positive.

• PEG Ratio

  If a stock has a P/E of 30 and analysts expect 30% annual earnings growth, its PEG is 1.0 — a fair multiple for that growth rate. A stock with the same P/E of 30 but only 10% expected growth has a PEG of 3.0, meaning investors are paying far more per unit of growth.

• EV/EBITDA

  Like P/E but for the entire company including its debt. A company with lots of debt looks cheap on P/E but expensive on EV/EBITDA — this ratio tells the full story.

• Return on Equity (ROE)

  If you invest $100 in a business and it earns $20 profit, ROE is 20%. Higher means the company is better at making money with your investment.

• Return on Assets (ROA)

  If a bakery owns $50,000 of ovens, ingredients, and cash and earns $5,000 in profit over the year, its ROA is 10% — it turns every dollar of assets into 10 cents of annual profit. A business earning that same $5,000 spread over $500,000 of assets has an ROA of just 1%, despite an identical dollar profit.

• Return on Invested Capital (ROIC)

  ROIC asks how much after-tax operating profit a company generates for every dollar of capital — debt and equity combined — invested in the business. A company earning $15 of NOPAT on $100 of invested capital has a 15% ROIC. Compare that to WACC, the blended cost of that debt and equity, to see whether the business is creating or destroying value.

• Current Ratio

  If you have $200 in the bank and $100 in bills due this month, your current ratio is 2.0. Above 1 means the company can pay its near-term debts.

• Quick Ratio

  Same as current ratio but removes inventory (stuff you haven't sold yet) from the assets side. If a company has $150 in cash and receivables, $50 in inventory, and $100 in current liabilities, its current ratio is 2.0 but its quick ratio is only 1.5 — a stricter test because inventory can be slow or hard to sell in a crisis.

• Debt-to-Equity Ratio

  If a company has $50 in debt and $100 in shareholder equity, D/E is 0.5. Higher means more leveraged — good in boom times, dangerous in downturns.

• Interest Coverage

  If you earn $5,000/month and your loan payments are $500, your interest coverage is 10x. Higher is safer — it means the company easily affords its debt payments. A company earning just $600 against that same $500 bill has a coverage of only 1.2x and very little room for a bad month.

• FCF Margin

  If a business earns $100 in sales and has $15 left after paying all its bills and investing in the equipment needed to keep running, its FCF margin is 15%. Cash is what actually funds dividends, buybacks, and debt paydown — accounting profit alone doesn't.

• Gross Margin

  If you sell a sandwich for $10 and the ingredients cost $3, your gross margin is 70% — the product itself is highly profitable before rent, salaries, or marketing even enter the picture. A supermarket reselling the same sandwich for $10 after paying $8 to stock it has a gross margin of just 20%.

• Operating Margin

  After paying for the ingredients AND the rent, salaries, marketing, and everything else it takes to run the business day to day, what percentage of each sales dollar is left? A retailer selling $100 of goods and clearing $8 after all of that has an 8% operating margin — before interest and taxes are even considered.

• Net Margin

  Net margin is what's left after EVERY expense — cost of goods, rent, salaries, interest on debt, and taxes. If a company brings in $100 of revenue and keeps $12 after all of that, its net margin is 12%. It's the strictest profitability measure, sitting below gross and operating margin since it also absorbs financing costs and one-time items.

• Dividend Yield

  If a stock trades at $100 and pays $3 a year in dividends, the yield is 3% — similar to the interest rate on a savings account, but for a stock. Because yield is dividends divided by price, it also rises whenever the stock price falls, even if the dividend itself hasn't grown at all.

• Earnings Per Share (EPS)

  If a company earns $1 billion and has 100 million shares, each share 'earned' $10. Growing EPS over time is a main driver of stock price growth — but check whether it's coming from more profit or just fewer shares outstanding after buybacks, since both raise the number.

• Revenue Growth

  If a company sold $100M last year and $120M this year, revenue grew 20%. Fast growth is exciting but check if it's profitable growth or just spending more to sell more.

• Free Cash Flow Yield

  If a company is worth $1B on the stock market and generates $80M in free cash over the year, its FCF yield is 8%. Think of it as the 'real' earnings yield — built on actual cash the business throws off, rather than accounting profits that can include non-cash items.