Financial ratios are comparative measures – usually expressed as a percentage – used to assess the financial health of a company. Financial ratios convert financial information to a standardised format to make comparison easier.

Used across a variety of industries, financial ratios are essential tools investors use to assess companies’ strengths and efficiencies. We provide access to the most widely used financial ratios in the financial services industry, including liquidity, coverage, leverage and operating ratios. 

UK Financial Ratios complement the in-depth analysis found throughout our UK Industry Research Reports by providing a detailed financial analysis of the industry, so you have the knowledge necessary to make more informed business decisions.
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While financial ratios are valuable across a wide range of industries, professionals in financial services roles find financial ratios especially important. 

Banking professionals use financial ratios for a variety of important activities including credit analysis for benchmarking, annual credit reviews, identifying red flags in a company (which could prompt further due diligence) and identifying triggers and performance tolerance in portfolios. Relationship managers find them valuable within their prospecting processes.

Those involved in business valuation can apply financial ratios to benchmark current clients and see if broader industry conditions explain a client’s financial performance. Ratios can also be used to tailor predictions for cash flow projections in a new business (e.g., expected level of depreciation) and as a basis for economic adjustments to a client’s financial statements (e.g., working capital, cashflows).

Audit professionals use ratios and industry data as a benchmark when auditing clients. Ratios provide a way to base expectations and get comfortable with the industry data before looking into a client's financials, as well as identify potential areas of concern, help determine lines of questioning and assist in reviews in “limited assurance” audits.

Professionals involved in procurement use ratios for supplier benchmarking, identifying areas of concern with a supplier, or to understand the level of reliance suppliers have based on liquidity levels. Procurement can also identify triggers and performance tolerances in portfolios.

Here are the available UK financial ratio definitions and how to calculate them.

Total Current Assets divided by Total Current Liabilities

This ratio is a rough indication of a firm’s ability to service its current obligations. Generally, the higher the current ratio, the greater the “cushion” between current obligations and a firm’s ability to pay them. While a stronger ratio shows that the numbers for current assets exceed those for current liabilities, the composition and quality of current assets are critical factors in the analysis of an individual firm’s liquidity.

Cash plus Equivalents to Trade Receivables divided by Total Current Liabilities

Also known as the “acid test,” this is a stricter, more conservative measure of liquidity than the current ratio. This ratio reflects the degree to which a company’s current liabilities are covered by its most liquid current assets, the kind of assets that can be converted quickly to cash and at amounts close to book value. Inventory and other less liquid current assets are removed from the calculation. Generally, if the ratio produces a value that’s less than 1 to 1, it implies a dependency on inventory or other less current assets to liquidate short-term debt.

Net Sales divided by Trade Receivables

This ratio measures the number of times trade receivables turn over during the year. The higher the turnover of receivables, the shorter the time between sale and cash collection.

Divide the Sales/Receivables Ratio into 365

This figure expresses the average number of days that receivables are outstanding. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivable. A comparison of this ratio may indicate the extent of a company’s control over credit and collections. However, companies within the same industry may have different terms offered to customers, which must be considered.

Cost of sales divided by Inventory

This ratio measures the number of times inventory is turned over during the year.

High inventory turnover — On the positive side, high inventory turnover can indicate greater liquidity or superior merchandising. Conversely, it can indicate a shortage of needed inventory for sales.

Low inventory turnover — Low inventory turnover can indicate poor liquidity, possible overstocking, or obsolescence. On the positive side, it could indicate a planned inventory buildup in the case of material shortages.

Divide the Cost of Sales/Inventory Ratio into 365

Dividing the inventory turnover ratio into 365 days yields the average length of time units are in inventory.

Cost of Sales divided by Trade Payables

This ratio measures the number of times trade payables turn over during the year. The higher the turnover of payables, the shorter the time between purchase and payment. If a company’s payables appear to be turning more slowly than the industry, then the company may be experiencing cash shortages, disputing invoices with suppliers, enjoying extended terms, or deliberately expanding its trade credit. The ratio comparison of company to industry suggests the existence of these or other possible causes. If a firm buys on 30-day terms, it is reasonable to expect this ratio to turn over in approximately 30 days.

Divide the Cost of Sales/Payables Ratio into 365

Division of the payables turnover ratio into 365 days yields the average length of time trade debt is outstanding.

Net Sales divided by Net Working Capital (current assets less current liabilities equals net working capital)

Because it reflects the ability to finance current operations, working capital is a measure of the margin of protection for current creditors. When you relate the level of sales resulting from operations to the underlying working capital, you can measure how efficiently working capital is being used.

Net Cash after Operations divided by Cash and Noncash Interest Expenses

This ratio is a measure of a firm’s ability to service debt by generating cash to meet interest payments. It’s an alternative to the earnings coverage return. This ratio also serves as an indicator of a company’s capacity to incur additional debt.

Cash Flow from Operations divided by Debt

The cash flow coverage ratio is an indicator of the ability of a company to pay interest and principal amounts when they become due. This ratio tells the number of times the financial obligations of a company are covered by its earnings.

Cash Flow from Operations divided by Net Sales

Operating cash flow margin is a cash flow ratio which measures cash from operating activities as a percentage of sales revenue in a given period. Like operating margin, it is a trusted metric of a company’s profitability and efficiency and its earnings quality.

Cash Flow from Operations divided by Total Current Liabilities

This is a measurement of cash from operating activities to average current liabilities. This ratio demonstrates the ability for operations to generate cash that can be used to cover debts that need to be paid within a year’s time.

Fixed Assets (net of accumulated depreciation) divided by Tangible Net Worth (net worth minus intangibles)

This ratio measures the extent to which owner’s equity (capital) has been invested in plant and equipment (fixed assets). A lower ratio indicates a proportionately smaller investment in fixed assets in relation to net worth and a better “cushion” for creditors in case of liquidation. Similarly, a higher ratio would indicate the opposite situation. The presence of a substantial number of fixed assets that are leased — and not appearing on the balance sheet — may result in a deceptively lower ratio.

Total Liabilities divided by Tangible Net Worth

This ratio expresses the relationship between capital contributed by creditors and that contributed by owners. Basically, it shows how much protection the owners are providing creditors. The higher the ratio, the greater the risk being assumed by creditors. A lower ratio generally indicates greater long-term financial safety. Unlike a highly leveraged firm, a firm with a low debt/worth ratio usually has greater flexibility to borrow in the future. Tangible net worth may be zero, in which case the ratio is undefined (UND). Tangible net worth may also be negative, which results in the quotient being negative.

(Profit Before Taxes divided by Tangible Net Worth) times 100

This ratio expresses the rate of return on tangible capital employed. While it can serve as an indicator of management performance, you should always use it in conjunction with other ratios. Normally associated with effective management, a high return could actually point to an undercapitalised firm. Conversely, a low return that’s usually viewed as an indicator of inefficient management performance could actually reflect a highly capitalised, conservatively operated business.

Average Total Assets of a company minus Average Total Liabilities of a company in the industry

Net Sales divided by Total Assets

This ratio is a general measure of a firm’s ability to generate sales in relation to total assets. It should be used only to compare firms within specific industry groups and in conjunction with other operating ratios to determine the effective employment of assets.

Net Sales divided by Fixed Assets

This ratio is a measure of the productive use of a firm’s fixed assets. If the fixed figure is zero, the quotient is undefined (UND). The only time a zero will appear in the array will be when the sales figure is low and the quotient rounds off to zero. These ratio values cannot be negative.

(Profit Before Taxes divided by Total Assets) times 100

This ratio expresses the pre-tax return on total assets and measures the effectiveness of management in employing the resources available to it. If a specific ratio varies considerably from the ranges found in this book, the analyst will need to examine the makeup of the assets and take a closer look at the earnings figure. A heavily depreciated plant and a large amount of intangible assets or unusual income or expense items will cause distortions of this ratio.

Short-term, highly liquid investments which are readily convertible to known amounts of cash, or items that are similar to cash, and which are subject to an insignificant risk of changes in value.

Claims made against trade debtors (i.e., amounts due from customers) less the amount owed that will likely never be paid. Also referred to as “accounts receivable.”

Tangible assets held for sale in the ordinary course of business, or goods in the process of production for such sale, or materials to be consumed in the production of goods and services for sale.

The combination of cash and equivalents, trade receivables, inventory and other resources that are expected to be realised in cash, or sold or consumed within the normal operating cycle of business (one year).

The purchase cost of assets held for use in the production or supply of goods and services, for rental to others, or for administrative purposes on a continuing basis in the reporting entity's activities (e.g., land, buildings, equipment).

The total value of all cash and equivalents, trade receivables, inventory, current assets, fixed assets and any other items of value owned and or controlled by the reporting entity.

The financial obligations of the reporting entity which are expected to be repaid to the creditor within the normal operating cycle of business (one year).

Claims made by trade creditors (i.e., amounts due to vendors) for inventory-related goods and supplies. Also referred to as “accounts payable.”

The total short-term financial obligations of the reporting entity, which includes short-term debt, trade payables and other compulsory outgoings, which are expected to be repaid to the creditors within the normal operating cycle of business (one year).

The financial obligations of the reporting entity which may mature beyond the normal operating cycle of business (one year) and those which are often treated differently to short-term debt by creditors.

The monetary value of the reporting entity, calculated as total assets less total liabilities.

Average total of liabilities and net worth of a company in the industry.

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