5 FINANCIAL RATIOS YOU CAN EASILY CALCULATE IN EXCEL

Financial ratios are tools for analyzing a company's performance, health, and efficiency. They distill complex financial statements into digestible numbers, offering quick insights for investors, managers, and analysts. Excel is the perfect platform for calculating these ratios, as it allows for easy data input, formula creation, and dynamic updates.

5 Financial Ratios You Can Easily Calculate In Excel

Here are five essential financial ratios you can easily calculate in Excel.

• Current Ratio (Liquidity)

  Purpose: Measures a company's ability to meet its short-term obligations (those due within one year). A higher ratio generally indicates better liquidity.

  Formula: Current Assets / Current Liabilities

  How to calculate in Excel:

  Assume Current Assets are in cell B2 and Current Liabilities are in B3.

  =B2/B3

  Insight: A ratio of 2:1 (or 2.0) is often considered healthy, meaning current assets are twice current liabilities.

  
  

• Debt-to-Equity Ratio (Solvency)

  The Debt-to-Equity Ratio is a solvency indicator that illustrates the proportion of a company's assets financed by debt compared to shareholder equity. Simply put, it shows how well shareholder equity can absorb a company's total debts, acting as a financial cushion.

  Formula: Total Debt / Shareholder's Equity

  How to calculate in Excel:

  Assume Total Debt in B4 and Shareholder's Equity in B5.

  =B4/B5

  Insight: A lower ratio is generally preferred, indicating less reliance on debt financing.

  
  

• Gross Profit Margin (Profitability)

  Purpose: Shows the percentage of revenue left after deducting the cost of goods sold. It indicates how efficiently a company is using its labor and supplies in the production process.

  Formula: (Revenue - Cost of Goods Sold) / Revenue or Gross Profit / Revenue

  How to calculate in Excel:

  Assume Revenue in B6 and Cost of Goods Sold in B7.

  =(B6-B7)/B6

  Insight: A larger gross profit margin provides a greater surplus to cover operational costs and contribute to net profit.

  
  

• Return on Assets (ROA) (Efficiency/Profitability)

  Purpose: Measures how efficiently a company is using its assets to generate profits.

  Formula: Net Income / Total Assets

  How to calculate in Excel:

  Assume Net Income in B8 and Total Assets in B9.

  =B8/B9

  Insight: A higher ROA indicates that the company is effectively managing its assets to produce earnings.

  
  

• Inventory Turnover Ratio (Efficiency)

  Purpose: Measures how many times inventory is sold and replaced over a period. It indicates how quickly a company is selling its inventory.

  Formula: Cost of Goods Sold / Average Inventory (Average Inventory = (Beginning Inventory + Ending Inventory) / 2)

  How to calculate in Excel:

  Assume Cost of Goods Sold in B7, Beginning Inventory in B10, and Ending Inventory in B11.

  =B7/((B10+B11)/2)

  Insight: A higher turnover ratio can indicate efficient sales and inventory management, but it varies significantly by industry.

By setting up these ratios in Excel, you can quickly analyze financial statements, compare companies, and track performance over time, making it an indispensable tool for financial analysis.