Financial Ratio Analysis
Ratios turn raw balance sheet and P&L figures into comparable indicators of a business's health. Banks use them to sanction loans, investors to judge returns and owners to spot problems early. This tool computes twenty commonly used ratios from fifteen inputs and tells you whether each is in a comfortable range.
Ratio groups and formulas
- Liquidity: Current ratio = Current assets ÷ Current liabilities (banks like ≥ 1.33). Quick ratio = (Current assets − Inventory) ÷ Current liabilities (≥ 1).
- Profitability: Gross margin, operating (EBIT) margin and net margin as % of sales; Return on Equity = Net profit ÷ Equity; ROCE = EBIT ÷ (Total assets − Current liabilities).
- Leverage: Debt-equity = Total debt ÷ Equity (≤ 2:1 for most bank limits). Interest coverage = EBIT ÷ Interest (≥ 2). DSCR = (EBIT + Depreciation) ÷ (Interest + Principal repaid) (≥ 1.25).
- Efficiency: Inventory, receivables and payables turnover with days (DIO, DSO, DPO); Cash conversion cycle = DIO + DSO − DPO; Asset turnover = Sales ÷ Total assets.
Worked example
Sales ₹24,00,000; COGS ₹15,60,000; EBIT ₹3,12,000; interest ₹42,000; net profit ₹2,05,000; current assets ₹6,20,000 (inventory ₹1,80,000, receivables ₹2,40,000); current liabilities ₹3,65,000; debt ₹4,50,000; equity ₹9,45,000; total assets ₹17,60,000. Results: current ratio 1.70, quick ratio 1.21, net margin 8.5%, ROE 21.7%, debt-equity 0.48, interest coverage 7.4x, DSO 37 days, DIO 42 days, DPO 50 days → cash conversion cycle 29 days. All in the comfortable zone.
DuPont decomposition
ROE = Net margin × Asset turnover × Equity multiplier. The tool shows the three components so you can see whether returns come from pricing power, asset efficiency or borrowing.
Caveats
Benchmarks are rules of thumb; a supermarket runs on thin margins and fast turnover while a machinery maker does the opposite. Compare with industry peers and with your own trend over several years.
Frequently Asked Questions
What current ratio do banks expect?
Most Indian banks look for a minimum current ratio of 1.33 for working-capital limits, though 1.17–1.25 may be accepted for MSMEs.
What is DSCR and why does it matter?
Debt Service Coverage Ratio measures cash available to pay interest and principal. Lenders usually require at least 1.25 for term loans.
What is a good debt-equity ratio?
Below 1:1 is conservative; up to 2:1 is generally acceptable for bank finance; higher indicates heavy leverage.
Why do some ratios show "—"?
A ratio is undefined when its denominator is zero (for example interest coverage with zero interest).
Disclaimer: This tool is for general information and estimation only. Tax rates and rules change — verify with official sources or a professional before acting. Read full disclaimer.