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 |