Key Financial Ratios Explained

Revenue divided by average total assetsThe sum of resources controlled by an entity that are expected to provide economic benefits..

Example: ₦10 billion sales on ₦5 billion assets gives two-times asset turnover.

Asset Turnover means revenue divided by average total assets; the accounting measure should be reconciled to the other statements because profit, cash flow and changes in assets or liabilities describe different views of the same business.

In formula form, the measure uses revenue as the numerator and average total assets as the denominator. For example, ₦10 billion sales on ₦5 billion assets gives two-times asset turnover.

For Asset Turnover, read the accounting policy and note disclosureThe provision of material information needed for informed decisions., compare several periods, reconcile the figure with cash flow and test whether acquisitions, currency or one-off items distort the trend; management-adjusted measures may exclude costs that still affect shareholders.

InventoryGoods held for sale, production, or consumption in the production process. days plus receivable days minus payable days.

Example: The company holds inventory 40 days, collects in 30 days, and pays in 20 days, giving a 50-day cycle.

Cash Conversion Cycle describes inventory days plus receivable days minus payable days; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

The company holds inventory 40 days, collects in 30 days, and pays in 20 days, giving a 50-day cycle.

Do not isolate Cash Conversion Cycle; link it to revenue, margins, working capitalCurrent operating assets minus current operating liabilities, with exact components depending on the analysis., debt and cash flow, and compare the definition used by management with the accounting standard. One-off items and estimates can dominate a single reporting period.

Cash and cash equivalentsCash plus highly liquid short-term investments with insignificant value-change risk. divided by current liabilitiesObligations expected to be settled within the normal operating cycle or about one year..

Example: ₦300 million cash against ₦600 million current liabilities gives a 0.5 cash ratio.

Cash Ratio means cash and cash equivalents divided by current liabilities; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

In formula form, the measure uses cash and cash equivalents as the numerator and current liabilities as the denominator. ₦300 million cash against ₦600 million current liabilities gives a 0.5 cash ratio.

For Cash Ratio, read the accounting policy and note disclosure, compare several periods, reconcile the figure with cash flow and test whether acquisitions, currency or one-off items distort the trend; classification choices can change ratios without changing the underlying economics.

Current assetsAssets expected to be realised, sold, or used within the normal operating cycle or about one year. divided by current liabilities.

Example: ₦2 billion current assets divided by ₦1 billion current liabilities gives a current ratio of 2.

Current Ratio describes current assets divided by current liabilities; the accounting measure should be reconciled to the other statements because profit, cash flow and changes in assets or liabilities describe different views of the same business.

In formula form, the measure uses current assets as the numerator and current liabilities as the denominator. ₦2 billion current assets divided by ₦1 billion current liabilities gives a current ratio of 2. Trend, comparability and the relationship with cash are what make it useful for investmentAn asset or commitment of money made with the expectation of future income, growth, or both. analysis.

A reliable review of Current Ratio compares reported growth with cash generation and balance-sheet movement, then explains every material divergence; classification choices can change ratios without changing the underlying economics.

Average number of days inventory remains before sale.

Example: A retailer holds about 60 days of inventory.

Days Inventory Outstanding describes average number of days inventory remains before sale; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

A retailer holds about 60 days of inventory.

Do not isolate Days Inventory Outstanding; link it to revenue, margins, working capital, debt and cash flow, and compare the definition used by management with the accounting standard. Management-adjusted measures may exclude costs that still affect shareholders.

Average number of days a company takes to pay suppliers.

Example: The manufacturer pays suppliers after 50 days on average.

Days Payable Outstanding describes average number of days a company takes to pay suppliers; the accounting measure should be reconciled to the other statements because profit, cash flow and changes in assets or liabilities describe different views of the same business.

The manufacturer pays suppliers after 50 days on average.

For Days Payable Outstanding, read the accounting policy and note disclosure, compare several periods, reconcile the figure with cash flow and test whether acquisitions, currency or one-off items distort the trend.

Average number of days required to collect customer receivables.

Example: Receivables equal to 45 days of sales indicate a 45-day DSO.

Days Sales Outstanding describes average number of days required to collect customer receivables; the accounting measure is part of the system used to record, classify and explain a company's financial position or performance. Its accounting definition determines when an amount is recognised.

Receivables equal to 45 days of sales indicate a 45-day DSO. For Days Sales Outstanding, trend, comparability and the relationship with cash are what make it useful for investment analysis.

Analyse Days Sales Outstanding through both the primary statement and its notes; check recognition rules, estimates, non-cash items, related-party effects and consistency with operating reality. Classification choices can change ratios without changing the underlying economics.

Debt divided by total assets.

Example: ₦4 billion debt on ₦10 billion assets gives a 40% debt-to-assets ratio.

Debt-to-Assets Ratio means debt divided by total assets; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

In formula form, the measure uses debt as the numerator and total assets as the denominator. ₦4 billion debt on ₦10 billion assets gives a 40% debt-to-assets ratio; the numbers show the reported effect, while notes to the accounts explain assumptions, classifications and movements that the face of the statement may conceal.

Analyse Debt-to-Assets Ratio through both the primary statement and its notes; check recognition rules, estimates, non-cash items, related-party effects and consistency with operating reality.

Debt divided by shareholders' equityThe residual interest in assets after liabilities are deducted..

Example: ₦6 billion debt and ₦4 billion equity produce a 1.5 debt-to-equity ratio.

Debt-to-Equity Ratio means debt divided by shareholders' equity; the accounting measure should be reconciled to the other statements because profit, cash flow and changes in assets or liabilities describe different views of the same business.

In formula form, the measure uses debt as the numerator and shareholders' equity as the denominator. ₦6 billion debt and ₦4 billion equity produce a 1.5 debt-to-equity ratio. Trend, comparability and the relationship with cash are what make it useful for investment analysis.

Analyse Debt-to-Equity Ratio through both the primary statement and its notes; check recognition rules, estimates, non-cash items, related-party effects and consistency with operating reality. Classification choices can change ratios without changing the underlying economics.

EBITDAEarnings before interest, tax, depreciation, and amortisation. expressed as a percentage of revenue.

Example: ₦250 million EBITDA on ₦1 billion revenue gives a 25% EBITDA margin.

EBITDA Margin describes EBITDA expressed as a percentage of revenue; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

EBITDA Margin is expressed as the relevant profit measure divided by revenue, which makes companies of different sizes easier to compare. ₦250 million EBITDA on ₦1 billion revenue gives a 25% EBITDA margin.

A reliable review of EBITDA Margin compares reported growth with cash generation and balance-sheet movement, then explains every material divergence; accounting profit can rise while cash generation weakens.

Gross profitRevenue minus the direct cost of goods or services sold. expressed as a percentage of revenue.

Example: Gross profit of ₦400 million on ₦1 billion revenue produces a 40% gross margin.

Gross Margin describes gross profit expressed as a percentage of revenue; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

Gross Margin is expressed as the relevant profit measure divided by revenue, which makes companies of different sizes easier to compare. Gross profit of ₦400 million on ₦1 billion revenue produces a 40% gross margin. Trend, comparability and the relationship with cash are what make it useful for investment analysis.

For Gross Margin, read the accounting policy and note disclosure, compare several periods, reconcile the figure with cash flow and test whether acquisitions, currency or one-off items distort the trend; one-off items and estimates can dominate a single reporting period.

Cost of goods soldDirect costs attributable to goods or services sold during a period. divided by average inventory.

Example: ₦1.2 billion cost of sales on ₦200 million inventory gives six-times turnover.

Inventory Turnover describes cost of goods sold divided by average inventory; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

In formula form, the measure uses cost of goods sold as the numerator and average inventory as the denominator. ₦1.2 billion cost of sales on ₦200 million inventory gives six-times turnover.

Do not isolate Inventory Turnover; link it to revenue, margins, working capital, debt and cash flow, and compare the definition used by management with the accounting standard.

Net debtInterest-bearing debt minus cash and cash equivalents. divided by EBITDA.

Example: ₦8 billion net debt and ₦2 billion EBITDA produce four-times leverageThe use of borrowed money or derivatives to increase exposure relative to invested capital..

Net Debt to EBITDA describes net debt divided by EBITDA; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

In formula form, the measure uses net debt as the numerator and EBITDA as the denominator. ₦8 billion net debt and ₦2 billion EBITDA produce four-times leverage.

A reliable review of Net Debt to EBITDA compares reported growth with cash generation and balance-sheet movement, then explains every material divergence; management-adjusted measures may exclude costs that still affect shareholders.

Net incomeProfit remaining after operating costs, financing costs, taxes, and other recognised items. expressed as a percentage of revenue.

Example: ₦100 million net income on ₦1 billion revenue produces a 10% net margin.

Net Profit Margin describes net income expressed as a percentage of revenue; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

Net Profit Margin is expressed as the relevant profit measure divided by revenue, which makes companies of different sizes easier to compare. ₦100 million net income on ₦1 billion revenue produces a 10% net margin.

A reliable review of Net Profit Margin compares reported growth with cash generation and balance-sheet movement, then explains every material divergence; one-off items and estimates can dominate a single reporting period.

Operating profitProfit from core operations after operating expenses but before financing costs and tax. expressed as a percentage of revenue.

Example: ₦200 million operating profit on ₦1 billion revenue equals a 20% operating margin.

Operating Margin describes operating profit expressed as a percentage of revenue; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

Operating Margin is expressed as the relevant profit measure divided by revenue, which makes companies of different sizes easier to compare. ₦200 million operating profit on ₦1 billion revenue equals a 20% operating margin.

Analyse Operating Margin through both the primary statement and its notes; check recognition rules, estimates, non-cash items, related-party effects and consistency with operating reality. Classification choices can change ratios without changing the underlying economics.

Liquid current assets divided by current liabilities, commonly excluding inventory and prepayments.

Example: Cash and receivables of ₦900 million against ₦600 million current liabilities give a 1.5 quick ratio.

Quick Ratio describes liquid current assets divided by current liabilities, commonly excluding inventory and prepayments; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

In formula form, the measure uses liquid current assets as the numerator and current liabilities, commonly excluding inventory and prepayments as the denominator. Cash and receivables of ₦900 million against ₦600 million current liabilities give a 1.5 quick ratio. Trend, comparability and the relationship with cash are what make it useful for investment analysis.

A reliable review of Quick Ratio compares reported growth with cash generation and balance-sheet movement, then explains every material divergence; classification choices can change ratios without changing the underlying economics.

Revenue or credit sales divided by average receivables.

Example: Higher receivables turnover generally indicates faster collection.

Receivables Turnover means revenue or credit sales divided by average receivables; the accounting measure is part of the system used to record, classify and explain a company's financial position or performance. Its accounting definition determines when an amount is recognised.

In formula form, the measure uses revenue or credit sales as the numerator and average receivables as the denominator. Higher receivables turnover generally indicates faster collection. Trend, comparability and the relationship with cash are what make it useful for investment analysis.

Analyse Receivables Turnover through both the primary statement and its notes; check recognition rules, estimates, non-cash items, related-party effects and consistency with operating reality. Accounting profit can rise while cash generation weakens.

Profit divided by average total assets.

Example: ₦500 million profit on ₦5 billion average assets gives 10% ROA.

Return on Assets means profit divided by average total assets; the usefulness of the accounting measure depends on the accounting policy, reporting period and management estimates behind the reported number.

In formula form, the measure uses profit as the numerator and average total assets as the denominator. ₦500 million profit on ₦5 billion average assets gives 10% ROA.

For Return on Assets, read the accounting policy and note disclosure, compare several periods, reconcile the figure with cash flow and test whether acquisitions, currency or one-off items distort the trend; management-adjusted measures may exclude costs that still affect shareholders.

Operating profit divided by capital employed under the stated definition.

Example: An industrial company compares EBIT with equity plus long-term debtBorrowings due more than one year from the reporting date..

Return on Capital Employed describes operating profit divided by capital employed under the stated definition; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

In formula form, the measure uses operating profit as the numerator and capital employed under the stated definition as the denominator. An industrial company compares EBIT with equity plus long-term debt; the numbers show the reported effect, while notes to the accounts explain assumptions, classifications and movements that the face of the statement may conceal.

Analyse Return on Capital Employed through both the primary statement and its notes; check recognition rules, estimates, non-cash items, related-party effects and consistency with operating reality. One-off items and estimates can dominate a single reporting period.

Profit attributable to ordinary shareholders divided by average ordinary equity.

Example: ₦600 million profit on ₦4 billion equity gives 15% ROE.

Return on Equity means profit attributable to ordinary shareholders divided by average ordinary equity; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

In formula form, the measure uses profit attributable to ordinary shareholders as the numerator and average ordinary equity as the denominator. ₦600 million profit on ₦4 billion equity gives 15% ROE.

Do not isolate Return on Equity; link it to revenue, margins, working capital, debt and cash flow, and compare the definition used by management with the accounting standard.

After-tax operating profit divided by capital invested in operations.

Example: A company earning 18% ROIC against a 12% cost of capital creates value.

Return on Invested Capital describes after-tax operating profit divided by capital invested in operations; timing and classification matter: cash movement, revenue recognition, expense matching and balance-sheet presentation may occur in different periods.

In formula form, the measure uses after-tax operating profit as the numerator and capital invested in operations as the denominator. A company earning 18% ROIC against a 12% cost of capital creates value.

A reliable review of Return on Invested Capital compares reported growth with cash generation and balance-sheet movement, then explains every material divergence.

The time between paying suppliers and collecting cash from customers.

Example: A shorter cycle reduces the amount of cash tied up in operations.

Working Capital Cycle is the time between paying suppliers and collecting cash from customers; the accounting measure is part of the system used to record, classify and explain a company's financial position or performance. Its accounting definition determines when an amount is recognised.

A shorter cycle reduces the amount of cash tied up in operations.

Do not isolate Working Capital Cycle; link it to revenue, margins, working capital, debt and cash flow, and compare the definition used by management with the accounting standard.