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 standardized 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. 

Canada Financial Ratios complement the in-depth analysis found throughout our Canada 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.

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

Liquidity ratios deal with a firm's ability to meet its current financial obligations and to withstand adverse economic conditions. Liquidity refers to liquid assets, which are assets easily converted to cash and that will be converted to cash in the near future. This is an indication of short-term financial strength.
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Total Current Assets divided by Total Current Liabilities
This ratio, also known as the working capital ratio, indicates a firm's ability to pay liabilities with current assets. The larger the ratio, the more liquid the business is. 
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Total Revenue divided by Accounts Receivable 
This ratio measures the number of times accounts receivable turn over during the year. It can be used to measure a company’s effectiveness in collecting its receivables from its customers.
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365 divided by Receivables Turnover Ratio
This figure expresses the average number of days that receivables are outstanding and 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.  
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Total Revenue divided by Closing Inventory
This ratio, also known as inventory turnover, indicates the average liquidity of the inventory or whether a business has over or under-stocked inventory. It is often calculated using "cost of sales" rather than "total revenue." 
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365 divided by Revenue to Closing Inventory
Dividing the inventory turnover ratio into 365 days provides the average number of days inventory is held by a company before it’s sold.
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Current Liabilities times 100, then divided by Equity
This percentage is a measure of liquidity, which indicates a firm's relative ability to pay its short-term debts. The lower the positive ratio, the more liquid the business. It also provides information on the capital structure of a business and how much of a firm's capital is financed through current debt.
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Total Revenue divided by Net Working Capital (Current Assets minus Current Liabilities equals Net Working Capital)
Working capital is a measure of the margin of protection for current creditors since it reflects a company’s ability to finance current operations. In the context of sales resulting from operations to the underlying working capital, this measures how efficiently working capital is being used.

Coverage ratios are used to measure a company’s ability to meet its short-term financial obligations.
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(Net Profit plus Interest and Bank Charges) divided by (Interest and Bank Charges)
This ratio, also known as “times interest earned,” calculates the average number of times that interest owing is earned and indicates how well a firm can cover its interest obligations on debt.
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These ratios measure a company’s ability to meet long-term financial obligations and can be used to gauge a company’s financial strength, especially during adverse economic conditions.
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Total Liabilities divided by Total Equity
This ratio indicates a firm's ability to pay its long-term debts. The debt-to-equity ratio also provides information on the capital structure of a business by providing the extent to which a firm's capital is financed through debt.
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Total Liabilities divided by Total Assets
This ratio indicates a firm's ability to pay its long-term debts, in terms of the amount of debt outstanding in relation to the amount of capital. The lower the ratio, the more solvent the business is.
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Net Fixed Assets times 100, then divided by Equity
Net fixed assets represent long-term investment, so this percentage indicates relative capital investment structure.

Operating ratios use balance sheet components to assess how well a business manages its assets to generate revenue or profit. 

Total Revenue divided by Equity
This indicates the profitability of a business, relating the total business revenue to the amount of investment committed to earning that income. 

Net Profit times 100, then divided by Equity
This percentage indicates the profitability of a business, relating the business income to the amount of investment committed to earning that income. This percentage is also known as "return on investment" or "return on equity." 

(Net profit + Interest and Bank Charges) times 100, then divided by Total Assets
This percentage, also known as "return on total investment,” serves as a profitability measure by representing the rate of return earned on the investment of total assets by a business. It reflects the combined effect of both the operating and the financing/investing activities of a business. 

The total of cash and other resources that are expected to be realized in cash, or sold or consumed within one year or within the normal operating cycle of the business, whichever is longer.

All claims against debtors arising from the sale of goods and services and any other miscellaneous claims with respect to non-trade transaction. It excludes loan receivables and some receivables from related parties.

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. It excludes assets held for rental purposes.

All current assets not accounted for in accounts receivable and closing inventory.

Tangible or intangible property held by businesses for use in the production or supply of goods and services or for rental to others in the regular operations of the business. It excludes those assets intended for sale. Examples of such assets include plant, equipment, patents and goodwill. Valuation of net fixed assets is recorded net of accumulated depreciation, amortization and depletion.

All other assets not elsewhere recorded, such as long-term bonds.

Average value of all resources controlled by an enterprise as a result of past transactions or events from which future economic benefits may be obtained.

Obligations that are expected to be paid within one year or within the normal operating cycle, whichever is longer. Current liabilities are generally paid out of current assets or through creation of other current liabilities. Examples of such liabilities include accounts payable, advance from customers, etc.

All current loans and notes payable to Canadian chartered banks and foreign bank subsidiaries, with the exception of loans from a foreign bank, loans secured by real estate mortgages, bankers’ acceptances, bank mortgages and the current portion of long-term bank loans.

Short-term loans other than bank loans, accounts payable, the current portion of long-term debt, advances and prepayments due to affiliates and other current liabilities.

Obligations that are not reasonably expected to be liquidated within the normal operating cycle of the business but instead are payable at some date beyond that time. It includes obligations such as long-term bank loans and notes payable to Canadian chartered banks and foreign subsidiaries, with the exception of loans secured by real estate mortgages, loans from foreign banks and bank mortgages and other long-term liabilities.

The obligations of an enterprise arising from past transactions or events, the settlements of which may result in the transfer of assets, provisions of services or other yielding of economic benefits in the future.

The net worth of businesses including such elements as the value of common and preferred shares, and earned, contributed and other surpluses.

Average Total Liabilities plus Average Total Equity

All interest expenses and discounts paid by the business, such as real estate mortgages, chattel mortgages, mortgage bonds, advances and demand loans, bank interest, etc.

The profit or loss resulting from normal business operations, recorded before income taxes, extraordinary items and other income not related to normal operations.

Revenue from the sale of goods and services, interest, dividends, commissions, rent and other sources of revenue. It excludes capital gains or losses, extraordinary gains or losses and equity in net income of related parties.

Current Assets minus Current Liabilities.
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*Definition Sources: Innovation, Science and Economic Development Canada

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