101 Financial Ratios and Metrics to Improve Your Investing Skills

This article covers 101 financial ratios and metrics investors need to know.

This list is by no means all inclusive. It does however contain several interesting and informative metrics.

Metrics are listed by category below:

• The Basics – Income Statement: #1 through #8
• The Basics – Balance Sheet: #9 through #14
• The Basics – Cash Flow Statement: #15 through #17
• The Basics – Miscellaneous: #18 through #22
• Profitability Ratios: #23 through #27
• Stock Price Risk Metrics: #28 through #31
• Fundamental Risk Formulas & Metrics: #32 through #36
• Risk/Return Ratios: #37 through #44
• Dividend Ratios & Metrics: #45 through #50
• Growth, Return, & Performance Ratios & Metrics: #51 through #54
• Valuation Ratios, Metrics, & Formulas: #55 through #73
• Balance Sheet & Debt Risk Metrics & Ratios: #74 through #78
• Technical & Momentum Ratios & Metrics: #79 through #83
• Capital Asset Pricing Model & Portfolio Ratios & Metrics: #84 through #90
• Alternative Earnings Metrics: #91 through #93
• Miscellaneous Descriptive Ratios & Metrics: #94 through #96
• Other Business Performance Ratios & Metrics: #97 through #101

The 8 Rules of Dividend Investing are a compilation of some of the most important metrics in this list.

The 8 Rules of Dividend Investing help dividend growth investors build a portfolio of high quality dividend growth stocks trading at fair or better prices.

The Basics – Income Statement

The income statement has (arguably) the single most important financial report in today’s business world. It is a good starting point when analyzing a business.

#1 Revenue

Revenue comes before earnings. Revenue is also known as sales or the ‘top line’. It is the amount of money generated from the sale of a product or service. If revenue is increasing that shows an increased demand for a company’s products/services. Declining revenue shows the opposite.

#2 Expenses

Expenses are the opposite side of revenue. Revenue less expenses equals profit. Expenses are all the costs a business has (including taxes, interest, payroll, research and development, cost of goods sold, etc).

#3 Depreciation

Depreciation is the reduction in value of an asset over time due to normal wear and tear. As an example, your car will be worth less next year than it is worth today. This decrease in value over time is expensed as depreciation in accounting. The depreciation of intangible assets is called amortization.

#4 Earnings & Adjusted Earnings

You cannot calculate the price-to-earnings ratio without earnings. Earnings go by many names:

• Earnings
• Profits
• The-bottom-line
• Net profit

Earnings are what is left over after all expenses – including interest and taxes – are paid.

Earnings are a GAAP measure (generally accepted accounting principles). Corporations will often adjust earnings for 1 time or unusual expenses. These may include lawsuits, restructuring charges, or acquisition costs.

When used correctly adjusted earnings show a corporations ongoing earnings power. Corporate managements will sometimes use adjusted earnings to hide real problems in the business. Both earnings and adjusted earnings should be scrutinized before being blindly accepted.

#5 Earnings-Per-Share

Earnings-per-share is total earnings dividend by total share count. It shows the amount of profit over the last 12 months that was generated for each share.

#6 Gross Margin

Gross margin is gross profit divided by revenue. Gross profit is revenue minus cost of goods sold. Gross margin tells you what percentage of revenue a business keeps before paying any expenses other than the cost of goods.

#7 Operating Margin

Operating margin is operating profit divided by revenue. Operating profit includes most expenses, but does not include interest or taxes. Operating margin gives picture of the profitability of a business without obscuring earnings power with interest expenses or differences in taxes.

#8 Net Margin

Net margin (also called net profit margin) is net income divided by revenue. It is the ‘bottom line’ number that shows what percentage of every dollar in revenue a company keeps after accounting for all expenses.

The Basics – Balance Sheet

The balance sheet shows the current position of a business, including cash, debt, and assets. It gives a snapshot of the financial state of a business.

#9 Assets

An asset is property (including intangible property) that has value and could likely be used to meet debts, commitments, or liabilities. Examples include current assets, land, equipment, goodwill, patents, and vehicles (among many others).

#10 Current Assets

Current assets are a subset of assets. The definition of a current asset is any balance sheet item that can be reasonably expected to be converted to cash within one year. Examples include: cash, cash equivalents, marketable investments (like publicly traded stocks), accounts receivable, and inventory, among others.

#11 Liabilities

Liabilities are future obligations a business is likely to owe. They are the opposite of assets. Examples of liabilities include current liabilities and long-term debt.

#12 Current Liabilities

Current liabilities are the opposite of current assets. Current liabilities are obligations that are reasonably expected to be paid within one year. Examples include short-term debt and accounts payable.

#13 Debt

The term ‘debt’ is used interchangeably in accounting, finance, and investing. It often refers specifically to bonds, credit lines, and other borrowings. Occasionally debt is used as a synonym for liabilities, as is the case in the debt to equity ratio.

#14 Equity

Equity is assets minus liabilities. It is a quick way to broadly gauge the overall built up value in a corporation. In general, more equity is better than less equity. Equity is also called book value.

The Basics – Cash Flow Statement

The cash flow statement shows cash flows into and out of the company. It is less prone to management manipulation than the income statement.

#15 Capital Expenditures

Capital expenditures are money spent by a business to purchase assets. Capital expenditures are often abbreviated as cap ex. It is important to differentiate between maintenance capital expenditures and growth capital expenditures. Maintenance capital expenditures should approximate depreciation (in straight forward cases) over the long run. Growth capital expenditures are funds spent on expanding the business rather than replacingold portions of the business.

#16 Operating Cash flow & Cash Flow from Operations

Operating cash flow (also called cash flow from operations) is on the statement of cash flows, not the income statement. Operating cash flow shows a company’s cash flows from its normal operations. It does not include depreciation and amortization, as well as other non-cash charges.

#17 Free Cash Flow

Free cash flow is calculated as operating cash flow minus capital expenditures. It is a cash based measure that does not suffer from the issues of accrual based accounting. Many investors prefer free cash flow to earnings as ‘cash doesn’t lie’.

The issue with free cash flow is determining the level of maintenance capital expenditures to growth capital expenditures. Free cash flow can unnecessarily penalize businesses which are investing heavily in growth. It is also more variable from year to year than earnings.

The Basics – Miscellaneous

#18 Market Capitalization

This is the total market value of a company’s outstanding shares.

#19 Enterprise Value

Enterprise Value calculates what it would cost to completely take over a business.

To do so you would have to buy all the shares in a business (market cap) and extinguish all debt (total debt). Once you took over the business you could distribute all excess cash to yourself.

In its most basic form the formula for calculating enterprise value is:

Enterprise value has been shown by many valuation ratios to be superior to market capitalization when ranking stocks based on value.

#20 Ticker

The ticker symbol (or ticker) is the 1 to 5 digit alphabetic code used to identify the shares of a specific corporation.

#21 Sector

Sector refers to the broad business category a stock falls into. There is no standard sector classification for different sectors. The most common include the following:

• Basic Materials
• Consumer Goods
• Financial
• Health Care
• Industrial Goods
• Services
• Technologies
• Utilities

Sector lists sometimes break consumer goods into staples and discretionary categories. Energy is also sometimes separated from basic materials. Telecommunications is also sometimes given its own sector.

It is critical to have some diversification between sectors when building your dividend growth portfolio.

#22 Volume

Volume is the amount of shares of a stock traded. It is generally calculated as daily volume. There is additional risk with buying and selling thinly traded shares as the bid-ask spreads tend to be much higher. Higher volume typically means you will be able to buy and sell easily.

Profitability Ratios

Profitability ratios can be used to determine how efficient a business is at making money. They are also useful in comparing the profitability of different businesses to one another. In general (and there are plenty of exceptions – think Amazon as an example) higher profitability ratios mean a company has a stronger competitive advantage.

#23 Return on Assets (abbreviated as ROA)

Return on Assets is calculated as net income divided by total assets. It is one of the simplest and most effective profitability ratios. Assets are used to scale profits as (virtually) every business has assets.

#24 Return on Equity (abbreviated as ROE)

Return on equity is calculated as net income divided by equity. It shows the percentage of profit a company can make on its equity every year. For some businesses (a retailer in growth mode is a suitable example), this is a good way to gauge how quickly a company can grow.

#25 Return on Invested Capital (abbreviated as ROIC)

Return on invested capital identifies the profit a company is making on money from its capital base.

The numerator in the formula is net operating profit after taxes (abbreviated as NOPAT). This does not include interest expense. The reason being that this ratio is looking to find profitability before payment to debt investors.

The denominator in the formula is invested capital. It is calculated as total assets less excess cash and non-interest bearing current liabilities. The reason excess cash is subtracted is because it is not being used in actively funding the business. Non-interest bearing current liabilities are subtracted because they are capital invested in the business by suppliers, not investors. This is basically ‘free capital’ and should not be included in the calculation. Accounts payable is a good example of non-interest bearing current liabilities.

#26 Cash Return on Invested Capital (abbreviated as CROIC)

CROIC is very similar to return on invested capital. The denominator in this ratio is exactly the same as the denominator in ROIC.

The difference is in the numerator. ROIC uses NOPAT, while CROIC uses free cash flow in the numerator. Free cash flow is a cash based metric and is therefore not subject to the many estimates that go into accrual based measures like earnings.

#27 Gross Profitability Ratio

Robert Norvy-Marx’s paper titled The Other Side of Value: The Gross Profitability Premium found that businesses with a higher gross profitability ratio outperform those with a lower gross profitability ratio.

Intuitively, this makes sense. A business that can earn high margins should have a strong competitive advantage in place to be able to resist market forces and charge such a high premium. Highly profitable businesses should make more money for shareholders than low profitability businesses, all other things being equal.

The gross profitability ratio is very easy to calculate. It is simply gross profits divided by assets. The higher the gross profitability ratio, the better. It is a quick way to compare the amount of gross profits a business can generate from its asset base.

Stock Price Risk Metrics

Investing risk is fundamentally a qualitative exercise. To really understand the risk of a business you must understand its competitive position in the market and industry.

Qualitative investing is very messy. When opinions are involved there is no right or wrong before the fact. This makes creating a methodical framework for qualitative risk management difficult.

Perhaps because of this, several stock price based quantitative metrics have been designed to approximate investing risk.

#28 Standard Deviation

Stock price (return series) standard deviation is the most commonly used risk metric. It is calculated as the annualized stock price standard deviation of a given security.

Stock price volatility is used as a measure for risk because businesses with uncertain futures should see their stock price fluctuate more wildly (as prospects change at the drop of a hat) versus stable businesses with more secure futures.

#29 Beta

In most investing applications Beta refers to a specific securities’ sensitivity to overall stock market moves. A Beta greater than 1 shows more price sensitivity. That is to say, if the market declines by 10%, one would expect a stock with a Beta over 1 to decline by more than 10%. The converse is true on gains.

The higher the Beta, the riskier a stock is assumed to be. This is because it is more sensitive to the overall market than a stable business that is not so dependent on being in a positive market environment.

#30 Maximum Drawdown

Maximum drawdown is the biggest decline a stock has suffered as measured from stock price high to stock price low.

Maximum drawdown is a useful measure because it shows the largesthistorical declines a stock has suffered. If a stock has historical maximum drawdowns of 50% and an investor cannot tolerate maximum drawdowns greater than 25%, they have no business investing in that security.

#31 Value at Risk (abbreviated VaR)

Value at Risk is used to calculate minimum potential loss at a given confidence interval. VaR typically uses historical returns and the normal distribution. As an example, you could say at the 99% confidence interval (1% chance) my minimum expected loss is 20%. Said another way, I expect to lose 20% or more of the value of my investment 1% of the time.

Fundamental Risk Formulas & Metrics

The ratios below take a different approach to quantitatively analyzing risk. Instead of looking at stock price movement, these formulas take data from a businesses’ financials to quantitatively measure risk.

#32 Margin of Safety

The margin of safety concept is a risk management method popularized by Benjamin Graham. When one finds their estimated fair value of a company, they should not pay fair value. Instead, require a margin of safety so that if your fair value estimate is wrong, you still have margin of error in your purchase price.

Graham typically required a margin of safety of 67%. If his fair value calculation was $10 per share, he would only pay $6.70 for the stock so as to maintain his margin of safety.

#33 Sloan Ratio

A 1996 study (which has been updated) by Richard Sloan at the University of Pennsylvania found that over a 40 year period (from 1962 through 2001) buying the lowest Sloan ratio stocks and shorting the highest Sloan ratio stocks resulted in compound returns of 18% a year.

The Sloan ratio formula is shown below:

The Sloan ratio is used to see if reported net income closely matches cash flows. If it doesn’t, net income may not accurately reflect business results.

• A Sloan ratio between -10% and 10% it is in the safe zone.
• A Sloan ratio from -25% to -10% or 10% to 25% is in the warnings zone.
• A Sloan ratio less than -25% or greater than 25% is the danger zone.

#34 Piotroski F-Score

The Piotroski F-Score is a simple 9 point scoring system to separate successful businesses from unsuccessful businesses.

The 9 point scoring system is broken down into 3 categories:

Category 1: Profitability

1. One point if positive return on assets in current year
2. One point if positive operating cash flow in the current year
3. One point if higher return on assets in current year than previous year
4. One point if operating cash flows are greater than net income in current year

Category 2: Leverage, Liquidity, and Source of Funds

1. One point if long-term debt divided by assets is lower in current year than previous year
2. One point if current ratio is higher this year than previous year
3. One point if the company did not issue common shares in the current year

Category 3: Operating Efficiency

1. One point if gross margin is higher in current year than previous year
2. One point if asset turnover ratio is higher in current year than previous year

Investing in highly ranked F-Score stocks and shorting lowly ranked F-Score stocks resulted in 23% annual returns from 1976 to 1996.

The F-Score works by identifying businesses with cash generating operations – that are also seeing operations improve.

#35 Altman-Z Score

The Altman-Z Score was first introduced in 1968 by Edward Altman to estimate bankruptcy risk for manufacturing firms.

In 2012 he reintroduced the formula and provided an update (called the Altman-Z Plus Score) for any type of firm (not just manufacturing concerns). The formula for the Altman-Z Plus Score is below:

• A = Working Capital divided by Total Assets
• B = Retained Earnings divided by Total Assets
• C = EBIT divided by Total Assets
• D = Book value dividend by Total Liabilities

If the Altman-Z Score is above 2.6, the firm is likely financially sound.

If the Altman-Z Score is below 1.1, the firm is likely to go bankrupt.

The average Altman-Z Score of non-bankrupt companies is 7.7.

#36 Beneish-M Score

The Beneish-M Score is used to determine if a company is manipulating its earnings. Catching earnings manipulators early can save investors tremendous sums of money (the most famous earnings manipulator is Enron).

The original M-Score includes 8 variables. An updated version includes just 5 variables but performs slightly better than the 8 variable version.

• Days sales in receivables Index (abbreviated as DSRI)
• Gross margin index (abbreviated as GMI)
• Asset quality index (abbreviated as AQI)
• Sales growth index (abbreviated as SGI)
• Depreciation index (abbreviated as DEPI)

Each index metric is calculated as (Metric in current year) divided by (metric in prior year).

Each metric is given a corresponding weighting to calculate the Beneish-M Score. The formula is below:

If a company’s score is greater than -1.78 then there is a high likelihood the company is manipulating its earnings. The more negative the score, the better.

Risk/Return Ratios

Analyzing performance based upon returns alone does not factor in theamount of risk taken to acquire those returns. The risk/return ratios below all take different approaches to better quantifying investment performance while taking into account both risk and reward.

#37 Sharpe Ratio

The most widely used risk/return ratio is the Sharpe ratio. The Sharpe ratio is shown in the image below:

The Sharpe ratio subtracts the risk free rate of return from the return of the asset in question. This shows the excess return; the return above what you could have made from investing in a ‘riskless’ asset. The riskless asset is usually approximated via T-bill (short term United States government debt obligations with maturities less than 1 year) returns.

Excess return is then divided by the standard deviation of the return series. This divides returns by a proxy for risk. The more volatile returns are, the riskier they are said to be.

#38 Treynor Ratio

The Treynor ratio is identical to the Sharpe ratio except it uses Beta instead of standard deviation as the measure of risk.

The Treynor ratio is appropriate to use when a portfolio has diversified away non-systematic risk and has only systematic risk remaining. An example would be a well-diversified stock mutual fund.

The formula for the Treynor ratio is shown below:

#39 Sortino Ratio

The Sortino ratio seeks to improve on the Sharpe ratio by better defining risk. The Sortino ratio only looks at the downside standard deviation of returns.This means that upside volatility (positive returns) do not impact risk.

This is logical in that most investors are very happy to see their stocks jump 20% in one day, even though this would increase the standard deviation of the return series and increase risk according to the Sharpe ratio. The Sortino ratio does not suffer from this flaw.

The formula for the Sortino ratio is below:

#40 Calmar Ratio & MAR Ratio

The Calmar & MAR Ratios are very similar. They both uses Maximum Drawdown as the risk measure instead of standard deviation. Both also do not take the risk free rate of return into account.

Where the Calmar & MAR ratios differ is the time period in which they calculate returns and maximum drawdowns.

The Calmar ratio uses 3 years of rolling data. The MAR ratio uses data since inception of the investment/portfolio/account.

The formula for the Calmar Ratio is below:

The formula for the Mar ratio is below:

#41 Sterling Ratio

The Sterling ratio is very similar to both the Calmar and MAR ratios. The Sterling ratio takes into account the idea that the largest historical drawdownis not the largest possible maximum drawdown.

The Sterling ratio has an arbitrary ‘+10%’ added to the largest maximum drawdown to account for potentially larger future drawdowns.

The formula for the Sterling ratio is below:

#42 Omega Ratio

The Omega ratio differs from the other ratios in this article.

To calculate the Omega ratio, one must first pick a target return threshold. A common target is either 0% or the risk free rate (when calculating the Omega ratio).

The Omega ratio is calculated by summing historical returns above the return threshold minus threshold return and dividing them by the absolute value of the sum of returns below the threshold minus threshold return.

The Omega ratio can be used on non-normal distributions. This gives it a distinct advantage over ratios that use standard deviation. Stock price returnsapproximate the normal distribution, but they are not actually normally distributed. There are far too many ‘outlier events’ (think Black Monday in 1987) than a normal distribution would predict.

#43 Information Ratio

The information ratio measures a portfolio’s consistency and returns relative to a benchmark.

A high information ratio is achieved by building a portfolio that:

1. Closely tracks an index
2. Significantly outperforms an index

This is very difficult. A high information ratio shows that a portfolio manager is sticking with the outlined strategy while adding significant value when making investment decisions that differ from the index.

#44 Upside & Downside Capture Ratios

The downside capture ratio measures how a portfolio performed versus a benchmark when the benchmark fell in value.

The upside capture ratio measures how a portfolio performed versus a benchmark when the benchmark rose in value.

Capture ratios are calculated by dividing the portfolio performance over a time period by the benchmark performance over the same time period.

In an ideal world your portfolio would capture all of the upside movements of the market and none of the downside movements.

Dividend Ratios & Metrics

There are several metrics suited specifically for dividend investors. There aremany reasons to be a dividend investor. Chief among them is that dividend growth investing has historically outperformed the market – with lower stock price standard deviation. Secondly, dividend growth investing provides rising dividend income over time, which is important for investors seeking steady income in retirement (or early retirement).

#45 Dividend Yield

Dividend yield is a company’s dividend payments per share dividend by its share price. It is one of the most used metrics in dividend investing.

#46 Dividend Payout Ratio

The Dividend payout ratio is a company’s dividends divided by earnings. The higher the payout ratio is the larger the percentage of earnings being used to fund the dividend. By definition a payout ratio above 100% is unsustainable.

#47 Dividend Payback Period

The dividend payback period calculates the number of years it will take a dividend growth stock to ‘pay back’ the initial purchase price. The dividend payback period can be calculated with:

• Stock price
• Expected growth rate
• Annual dividend payment

The lower the dividend payback period, the better. The dividend payback period is not easily calculated like some of the other metrics in this article (like the P/E ratio, for example). You can download an Excel spreadsheet that quickly calculates the dividend payback period for a dividend growth stock at this link.

#48 Yield on Cost

Yield on cost measures the percent of dividend income your investment is generating from the purchase price.

If you buy a stock with a 3% dividend yield, and then annual dividend payments double over the next 10 years, your yield on cost will be 6%.

Warren Buffett (Trades, Portfolio)’s investment in Coca-Cola has a yield on cost of around 50%. He is getting back about 50% of his original investment in Coca-Cola everyyear from dividends.

Businesses with strong competitive advantages combined with years of growth create large yields on cost.

#49 Dividend Discount Model

The formula for the dividend discount model is shown below:

The dividend discount model is used to quickly estimate the ‘fair value’ of a dividend growth stock. An example is below.

Imagine a company is expecting $1.00 in dividends-per-share next year. The appropriate discount rate is 10%, and the growth rate is 5%. This stock’s fair value according to the dividend discount model would be $20.

The beauty of the dividend discount model is its simplicity. The difficulty in applying it practically is coming up with a ‘fair’ discount rate and an accurate future growth rate.

With that said, the dividend discount model is a useful tool for coming up with a ‘ballpark estimate’ of fair value for dividend growth stocks that have strong competitive advantages.

#50 Dividend History

Dividend history is simply the amount of time a business has paid dividends. This may seem like a vanity metric, but dividend history matters.

Businesses with 25+ years of rising dividends are less likely to cut their dividend payments.

There are several interesting groups of stocks by dividend history.

• The Dividend Aristocrats Index is comprised of 50 businesses with 25+ years of consecutive increases
• The Dividend Kings List is comprised of 17 businesses with 50+ years of consecutive dividend increases
• The Sure Dividend database in the Sure Dividend Newsletter has 180+ businesses (both domestic and international) with 25+ years of dividend payments without a reduction

Read part 2 of the article here.