
01Guide to Financial Statements
You can't calculate financial ratios without the financial statements! This guide to financial statements provides stepbystep instructions on how to read a balance sheet, income statement, and other important accounting documents.

02The 5 Categories of Financial Ratios
All financial ratios are divided into one of five categories. By learning each of these five categories, you'll know which financial ratio calculation is needed when you begin working through a company's financial statements.

03Price to Cash Flow Ratio
Some investors prefer to focus on a financial ratio known as the "price to cash flow ratio" instead of the more famous "pricetoearnings ratio" (or p/e ratio for short). Sit back, relax, and grab a cup of coffee because you're about to learn everything you ever wanted to know about this often overlooked stock valuation tool.

04Price to Earnings Ratio  The P/E Ratio
The price to earnings ratio, also known as the p/e ratio, is probably the most famous financial ratio in the world. It is used as a quick and dirty way to determine how "cheap" or "expensive" the stock is. The best way to think of it is how much you are willing to pay for every $1 in earnings a company generates. Learn how to calculate it, and much more.

05The PEG Ratio
While the price to earnings ratio (or p/e ratio for short) is the most popular way to measure the relative valuation of two stocks, the PEG ratio goes one step further. It stands for the pricetoearningstogrowth ratio. As you can tell by its title, the PEG ratio factors in a company's growth.

06Asset Turnover Ratio
The asset turnover financial ratio calculates the total sales for each dollar of asset a company owns. It measures a company's efficiency in using its assets.

07Current Ratio
Like the price to earnings ratio, the current ratio is one of the most famous of all financial ratios. It serves as a test of a company's financial strength and relative efficiency. For instance, you can tell if a company has too much, or too little, cash on hand.

08Debt to Equity Ratio
The debt to equity ratio is important because investors like to compare the total equity (net worth) of a company to its debt obligations. For instance, if you own $100 million worth of hotels and have $30 million in debt, you are going to be less concerned than if you have the same $30 million in debt with only $40 million worth of real estate. Learn how to calculate the debt to equity ratio and why it is important.

09Gross Profit Margin
The gross profit margin lets you know how much profit is available as a percentage of sales to pay payroll costs, advertising, sales expenses, office bills, etc. It's one of the most important financial ratios you can learn.

10Interest Coverage Ratio
The interest coverage ratio is an important financial ratio for firms that use a lot of debt. It lets you know how much money is available to cover all of the interest expense a company incurs on the money it owes each year.

11Inventory Turnover Ratio
If you need to know how many times a business turns its inventory over a period of time, you'll need to use the inventory turnover ratio. It allows you to see if a company has too many of its assets tied up in inventory and is heading for financial trouble. An extremely efficient retailer, for instance, is going to have a higher inventory turnover ratio than a less efficient competitor.

12Net Profit Margin Ratio
The net profit margin ratio tells you how much money a company makes for every $1 in revenue. Companies with higher net profit margins can often offer better benefits, heftier bonuses, and fatter dividends.

13Operating Profit Margin Ratio
Operating income, or operating profit as it is sometimes called, is the total pretax profit a business generated from its operations. It is what is available to the owners before a few other items need to be paid such as preferred stock dividends and income taxes.

14Quick Test Ratio
The Quick Test Ratio (also called the Acid Test or Liquidity Ratio) is the most excessive and difficult test of a company's financial strength and liquidity.

15Receivable Turns
When you are analyzing a business or a stock, common sense tells you that the faster a company collects its accounts receivables, the better. The sooner customers pay their bills, the sooner a company can put the cash in the bank, pay down debt, or start making new products. There is also a smaller chance of losing money to delinquent accounts. Fortunately, there is a way to calculate the number of days it takes for a business to collect its receivables  it's called receivable turns or receivable turnover, and it's a useful financial ratio to learn.

16Return on Assets (ROA) Ratio
Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA, tells an investor how much profit a company generated for each $1 in assets. The return on assets figure is also a surefire way to gauge the asset intensity of a business. For example, does the company in which you are researching have to spend large sums of money on expensive machinery before it can manufacture and sell a product to generate a return? It is one of the most important financial ratios you can know.

17Return on Equity (ROE) Ratio
One of the most important profitability metrics is a return on equity (or ROE for short). Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet.

18Advanced Return on Equity: The DuPont Model
Once you know how to calculate the return on equity financial ratio mentioned above, you need to go even further and break it down into the various components. This is called the DuPont analysis. By learning it, you can actually see what it is that makes a company profitable. It is, and remains, the secret to understanding most great fortunes.

19Working Capital Per Dollar of Sales
The working capital per dollar of sales financial ratio is important because it lets you know how much money a company needs to keep on hand to conduct business. Generally speaking, the more working capital a company needs, the less valuable it is because that's money the owners can't take out of the business in the form of dividends.
The Most Important Financial Ratios for New Investors
Before you can begin investing in individual stocks, it is important that you learn how to calculate financial ratios. Even if you decide to get your financial ratios from your broker or financial site, you still need to know what they represent and what they will tell you about the business in which you would like to invest. Otherwise, you may make a mistake and buy into a company with too much debt, not enough cash to survive, or low profitability. This guide to financial ratios will explain how to calculate the most important financial ratios, and, more importantly, what they mean.