Corporate Finance & CFO
Financial Ratio Cheat Sheet for CFOs & CAs: Formulas + Benchmarks
Twenty ratios cover almost every question a board, lender or investor will ask about a balance sheet and P&L. This is the reference sheet — formula, what it actually tells you, and a usable benchmark range for Indian mid-market businesses.
1. Liquidity Ratios — Can You Pay Your Bills?
*The ranges below are broad, illustrative starting points only — not a sourced industry benchmark. They are not segmented by sector, company size, observation period or dataset. Compare a ratio primarily against the company's own historical trend and direct sector peers; do not use these generic ranges alone for board, lender or covenant decisions.
| Ratio | Formula | Illustrative Range* | What It Tells You |
|---|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | 1.3x – 2.0x | Can short-term assets cover short-term obligations? Below 1.0x is a warning; above 3.0x may mean idle assets |
| Quick Ratio | (Current Assets – Inventory) ÷ Current Liabilities | 0.8x – 1.2x | Same as current ratio but excludes inventory — a stricter test of immediate liquidity |
| Cash Ratio | (Cash + Cash Equivalents) ÷ Current Liabilities | 0.2x – 0.5x | The most conservative liquidity test — can you pay short-term debts with cash alone |
2. Profitability Ratios — How Well Do You Convert Revenue to Profit?
| Ratio | Formula | Typical Range (varies hugely by sector) | What It Tells You |
|---|---|---|---|
| Gross Margin | Gross Profit ÷ Revenue | 20% – 60% | Pricing power and direct cost efficiency |
| EBITDA Margin | EBITDA ÷ Revenue | 10% – 30% | Core operating profitability before financing/tax/non-cash items |
| Net Profit Margin | Net Profit ÷ Revenue | 3% – 15% | Bottom-line profitability after all costs including interest and tax |
| ROCE | EBIT ÷ Capital Employed | 12% – 20%+ | Return generated on total capital (debt + equity) deployed — capital-structure neutral |
| ROE | Net Profit ÷ Shareholders' Equity | 12% – 18%+ | Return to equity holders specifically — can be inflated by leverage |
3. Leverage Ratios — How Much Debt Are You Carrying?
| Ratio | Formula | Illustrative Range* | What It Tells You |
|---|---|---|---|
| Debt-to-Equity | Total Debt ÷ Shareholders' Equity | < 1.0x – 1.5x | How much the business relies on debt vs. owner capital |
| Debt-to-EBITDA | Total Debt ÷ EBITDA | < 3.0x | How many years of current EBITDA it would take to repay all debt — a key covenant metric |
| Interest Coverage Ratio (ICR) | EBITDA ÷ Interest Expense | > 3.0x | Cushion between operating profit and interest cost — see our DSCR & ICR guide |
| DSCR | (EBITDA – Taxes) ÷ (Principal + Interest) | > 1.25x | Can operating cash flow cover the full annual loan repayment, not just interest |
4. Efficiency Ratios — How Well Do You Use Your Assets?
| Ratio | Formula | What It Tells You |
|---|---|---|
| Receivables Turnover / DSO | 365 ÷ (Revenue ÷ Avg. Receivables) | Average days to collect from customers — lower is better; see Working Capital Playbook |
| Inventory Turnover / DIO | 365 ÷ (COGS ÷ Avg. Inventory) | Average days inventory sits before sale — lower generally means less cash tied up |
| Payables Turnover / DPO | 365 ÷ (COGS ÷ Avg. Payables) | Average days taken to pay suppliers — higher means using supplier credit longer (within reason) |
| Asset Turnover | Revenue ÷ Total Assets | Revenue generated per rupee of assets — measures asset utilisation efficiency |
| Working Capital Turnover | Revenue ÷ Net Working Capital | Revenue generated per rupee of working capital invested |
Current Ratio vs Quick Ratio — A Worked Example
| Item | Company A (₹ Cr) | Company B (₹ Cr) |
|---|---|---|
| Cash | 5 | 15 |
| Receivables | 15 | 20 |
| Inventory | 30 | 5 |
| Total Current Assets | 50 | 40 |
| Current Liabilities | 25 | 20 |
| Current Ratio | 2.0x | 2.0x |
| Quick Ratio | 0.8x | 1.75x |
Both companies show an identical current ratio of 2.0x — appearing equally liquid. But Company A's quick ratio of 0.8x reveals that most of its short-term assets are tied up in inventory (₹30 Cr of its ₹50 Cr current assets). If that inventory takes longer than expected to sell, Company A could struggle to meet its ₹25 Cr of current liabilities. Company B, with most current assets in cash and receivables, is genuinely more liquid despite an identical current ratio — this is exactly why both ratios are reported together.
Putting It Together — A One-Page Dashboard
Most CFOs track 6-8 of these ratios on a single monthly dashboard, trended over the last 12 months:
- Liquidity: Current ratio, Quick ratio
- Profitability: EBITDA margin, Net margin, ROCE
- Leverage: Debt-to-EBITDA, ICR or DSCR (whichever is the binding covenant)
- Efficiency: DSO, DIO, DPO (or the combined Cash Conversion Cycle — see Working Capital CFO Playbook)
- Cash quality: Operating Cash Flow ÷ EBITDA — see EBITDA vs Operating Cash Flow
⚠ Ratios are sector-specific: The benchmark ranges above are general references for Indian mid-market non-financial businesses. A SaaS company, a real estate developer and a steel manufacturer have fundamentally different "normal" ranges — always compare a ratio against the company's own trend and direct sector peers, not a generic number.
Frequently Asked Questions
What are the four main categories of financial ratios? ▼
Liquidity ratios (current ratio, quick ratio) measure short-term ability to meet obligations. Profitability ratios (gross/EBITDA/net margin, ROCE, ROE) measure how efficiently revenue converts to profit and returns. Leverage ratios (debt-to-equity, debt-to-EBITDA, ICR) measure debt relative to equity and earnings. Efficiency ratios (inventory/receivables/asset turnover) measure how effectively assets generate revenue.
What is the difference between current ratio and quick ratio? ▼
Current Ratio = Current Assets ÷ Current Liabilities, including inventory. Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities. A business with a healthy current ratio but a much lower quick ratio has most short-term assets tied up in inventory — it looks liquid on one measure but could struggle if inventory doesn't convert to cash quickly.
What is ROCE and why do investors prefer it over ROE? ▼
ROCE = EBIT ÷ Capital Employed (Equity + Debt). ROE = Net Profit ÷ Shareholders' Equity. ROCE measures return on all capital before financing effects, making it easier to compare companies with different capital structures. ROE can be inflated by leverage — a company can boost ROE simply by borrowing more, without improving underlying operations.
Going Deeper on Leverage Ratios
DSCR, ICR, covenant types and what happens at a breach
Read the DSCR & ICR Guide →