- Jan 9
- 2 min read

10 Essential Financial Ratios and Formulas for Analyzing Business Profitability

Updated: Feb 3

1. Gross Profit Margin:

Gross Profit Margin = Revenue – Cost of Goods Sold /Revenue x 100

the percentage ratio of revenue you keep for each sale after all costs are deducted

(30% dangerous, 90% profitable)

2. Net Profit Margin:

Net Profit Margin=(Net Profit/Revenue)×100

how much net income or profit is generated as a percentage of revenue

(10% average, 20% good)

3. Return on Assets (ROA):

ROA=(Net Profit/Average Total Assets)×100

(5% or more)

how profitable a company's assets are in generating revenue

4. Return on Equity (ROE):

ROE=(Net Profit/Average Shareholders’ Equity)×100

a measure of the profitability of a business in relation to its equity

(15-20%)

5. Operating Profit Margin:

Operating Profit Margin=(Operating Profit/Revenue)×100

measures how much profit a company makes on a dollar of sales after paying for variable costs of production

(15% or more)

6. Break-Even Point:

Break-Even Point (in units)=Fixed Costs/Selling Price per Unit−Variable Cost per Unit

Break-Even Point (in dollars)=Break-Even Point (in units)×Selling Price per Unit

7. Earnings Before Interest and Taxes (EBIT):

EBIT=Net Income+Interest+Taxes

Ratio: EBIT/Net Income

(5% low, 20% high)

8. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA):

EBITDA=EBIT+Depreciation+Amortization

EBITDA Ratio = EBITDA/Net sales

(50% Good - relative to industry)

What is the 30% EBITDA rule?

The Interest Limitation Rule (ILR) is intended to limit base erosion using excessive interest deductions

The Rule of 40 = YoY Revenue Growth + EBITDA Margin

9. Quick Ratio (Acid-Test Ratio):

Quick Ratio=(Current Assets−Inventory/Current Liabilities)

the ability of a company to use its near-cash or 'quick' assets to extinguish or retire its current liabilities

( over 1)

10. Current Ratio

Current Ratio=(Current Assets/Current Liabilities)

a liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets

(over 1)

These financial Ratios and formulas provide insights into different aspects of a business's financial performance. Keep in mind that it's crucial to analyze these ratios in conjunction with each other and within the context of the specific industry and business model. Additionally, financial statements such as the income statement, balance sheet, and cash flow statement are essential tools for a comprehensive evaluation of a business's profitability.