📎 This article includes 1 downloadable practice file ↓
In this article
Ratios turn financial statements into answers: is the business profitable, can it pay its bills, how much does it owe, how fast does cash come back? Banks look at the same ratios when you apply for a loan.
Profitability
Gross margin %: =(Revenue - COGS) / Revenue
Net profit: =Revenue - COGS - Opex - Interest - Tax
Net margin %: =Net profit / Revenue
ROE %: =Net profit / EquityLiquidity
Current ratio: =(Inventory + Receivables + Cash) / Current liabilities
Quick ratio: =(Receivables + Cash) / Current liabilitiesA current ratio around 1.3-2 is common for trading businesses; below 1 means current liabilities exceed current assets. Context matters by industry.
Leverage
Debt-equity: =Total debt / Equity
Interest coverage: =EBIT / Interest ' EBIT = Revenue - COGS - OpexEfficiency (working capital)
Debtor days: =Receivables / Revenue * 365
Inventory days: =Inventory / COGS * 365
Creditor days: =Payables / COGS * 365
Cash cycle: =Debtor days + Inventory days - Creditor daysReading the practice company
Revenue grew 15%, margins held, and interest coverage is comfortable, but debtor and inventory days rose: growth is tying up more cash, which matches the lower cash balance. That’s the kind of one-paragraph conclusion a ratio sheet should lead to.
Where people go wrong
| Mistake | Effect |
|---|---|
| Year-end balances for seasonal businesses | Misleading days; use averages where possible |
| Mixing revenue and COGS bases | Inventory days on revenue understates them |
| Ratios without commentary | Nobody acts on them |
That’s the Excel for Finance course. Next: loan schedules and the Charts & dashboards course.
Practice
Download the workbook below. Build each figure in the yellow column of the Practice sheet; the Check column turns green when it matches, and the Answers sheet has a working formula for every task.
📎 Practice files for this article
- 📗Practice workbookTwo years of summarised P&L and balance-sheet figures for an example company.⬇ XLSX · 13 KB
Free to use for learning. Files with macros (.bas) are plain text — import them with Alt+F11 → File → Import File, and always test on a copy.
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