# 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