Income Statement Ratios Formula and Example

Definition

Income statement ratios are the ratios that analyze the company’s performance in the market during a period of time. These ratios usually measure the company’s ability in utilizing its capital and assets in order to generate sales and profit.

Although the financial statements, such as income statement and balance sheet, show the users how much profit the company made during the year, as well as how good is the current condition of the company, it did not show the full picture of how well the company performs during the period.

This is why understanding the income statement ratios are crucial for users of financial statements as it would help the users to analyze the information provided in the financial statements and gain a better understanding of how well the company was doing.

Also, it is more useful to compare these ratios to the previous period or other companies in the same industry. This would tell how well the company performs during the accounting period comparing to the previous period or its competitors.

9 Types of Income Statement Ratios with Formula

The nine income statement ratios below are the ratios that can be calculated using the publicly available financial statements of the company.

Types of Income Statement Ratios
No Ratio Formula Description

1

Gross Profit Margin

(Revenues – COGS) / Revenues

It is a profitability ratio that indicates the percentages of remaining revenues after deducting the cost of goods sold.

2

Operating Profit Margin

Operating Profit / Revenues

This ratio analyzes the company’s profitability at its operating level.

3

Net Profit Margin

Net Profit / Revenues

This ratio analyzes the company’s profitability after deducting all costs and expenses in the business.

4

Return on Assets

Net Profit / Average Assets

This ratio measures the company’s ability in generating profit from its assets.

5

Return on Equity

Net Profit / Average Equity

This ratio measures the company’s ability in generating profit from its equity.

6

Assets Turnover

Sales / Average Assets

This ratio measures the company’s performance in utilizing its assets to generate sales.

7

Interest Coverage Ratio

Earnings before Interest and Tax / Interest Expenses

This ratio analyzes the company’s ability to pay interest to its creditors.

8

Earnings Per Share

(Net Profit – Preferred Dividends) / Common Shares

This ratio analyzes the company’s ability to generate profit to its common shareholders.

9

Price-Earnings Ratio

Market Value per Share / Earnings per Share

This ratio analyzes the relationship between the company’s share price and its earnings per share.

 

Income Statement Ratios Example

For example, we have the balance sheet and income statement of ABC Limited as below.

INCOME STATEMENT 2018
Revenues $
Cash sales                        88,750
Credit sales                        50,820
Total Revenue 139,570
Cost of goods sold                        65,500
Gross profit 74,070
Operating expenses  
Salaries                        25,300
Advertising                          8,250
Office rent                          8,520
Utilities                          4,600
Office Supplies                             800
Depreciation                          2,200
Other expenses                          3,600
Total operating expenses 53,270
Operating profit 20,800
Operating income  
Interest Income                             800
Interest expenses 2,400
Net Income before Tax 19,200
Income tax expenses                          3,840
Net Income after Tax 15,360

 

BALANCE SHEET 2018 2017
 Current assets  $  $
 Cash and cash equivalents                        11,296                        14,862
 Receivables                          4,250                          3,520
 Inventories                        10,396                          8,580
 Other current assets                          2,450                          1,850
  28,392 28,812
 Non-current assets     
 Equipment                        60,782                        51,640
 Vehicles                        87,500                        87,500
 Accumulated depreciation                      (19,387)                      (17,187)
  128,895 121,953
 Total assets 157,287 150,765
 Current liabilities    
 Interest payables                             600                             788
 Account payables                          4,600                          3,800
 Accruals                          2,800                          2,650
 Other current liabilities                          4,355                          3,955
  12,355 11,193
 Non-current liabilities                                    
 Note payables                        35,000                        45,000
  35,000 45,000
 Total liabilities 47,355 56,193
 Equity                                    
 Share capital                        65,000                        65,000
 Retained earnings                        29,572                        17,500
 Profit/(Loss) current year                        15,360                        12,072
 Total Equity 109,932 94,572
 Total liabilities and equity 157,287 150,765

*Assume number of shares = 50,000; preferred dividend =0; market value per share = $2.5

What are the income statement ratios for ABC Limited in 2018?

Calculate Income Statement Ratios

With the balance sheet and income statement above we can calculate the ratios as below

Gross Profit Margin

= 74,070 / 139,570

= 53.07%

Operating Profit Margin

= 20,800 / 139,570

= 14.90%

Net Profit Margin

= 15,360 / 139,570

= 11.01%

Return on Assets

= 15,360 / (157,287 + 150,765) / 2

= 9.97%

Return on Equity

= 15,360 / (109,932 + 94,572)/2

= 15.02%

Assets Turnover

= 139,570 / (157,287 + 150,765)/2

= 0.91

Interest Coverage Ratio

= 20,800 / 2,400

= 8.67

Earnings per Share

= 15,360 / 50,000

= 0.31

Price-Earnings Ratio

= 2.5 / 0.31

= 8.14