Guide: Building a Basic Financial Ratios Calculator in Excel

Introduction

Financial ratio analysis is a cornerstone of financial statement analysis, providing insights into a company's liquidity, solvency, profitability, efficiency, and coverage capabilities. While sophisticated software exists, building a basic ratio calculator in Excel is an excellent way to understand the formulas and their components.

This guide provides a step-by-step approach to setting up a simple Excel template for calculating key financial ratios commonly used by credit analysts and financial analysts.

Purpose: To empower users to create their own basic ratio calculation tool for quick analysis and learning.

Audience: Students of finance, junior analysts, anyone looking to understand ratio calculations practically.

Note: This guide describes how to build the calculator; it does not provide a downloadable Excel file.

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I. Setting Up Your Excel Workbook

1. Create Sheets:
   • Input_IS: For inputting Income Statement data.
   • Input_BS: For inputting Balance Sheet data.
   • Ratios_Output: Where the calculated ratios will be displayed.
   • (Optional) Assumptions: For any specific assumptions like tax rate if not directly derivable.
2. Basic Formatting (Refer to Excel Best Practices Guide):
   • Use clear labels for rows (financial statement line items) and columns (periods - e.g., Year 1, Year 2, TTM).
   • Color-code input cells (e.g., blue font or light yellow fill) to distinguish them from formula cells (black font).
   • Ensure consistent number formatting.

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II. Inputting Financial Statement Data

A. Input_IS Sheet (Income Statement)

Structure this sheet to mirror a standard Income Statement. Below are essential line items. Add more as needed.

Line Item	Period 1 (e.g., Year 1)	Period 2 (e.g., Year 2)
Revenue (Sales)	[Input]	[Input]
Cost of Goods Sold (COGS)	[Input]	[Input]
Gross Profit	=B2-B3	=C2-C3
SG&A Expenses	[Input]	[Input]
Depreciation & Amortization	[Input]	[Input]
Other Operating Expenses/Income	[Input]	[Input]
Operating Income (EBIT)	=B4-B5-B6-B7	=C4-C5-C6-C7
Interest Expense	[Input]	[Input]
Interest Income	[Input]	[Input]
Pre-Tax Income (EBT)	=B8-B9+B10	=C8-C9+C10
Income Tax Expense	[Input]	[Input]
Net Income	=B11-B12	=C11-C12
(Optional for EBITDA)
EBITDA	=B8+B6	=C8+C6

(Assume B2 is Revenue for Period 1, B3 is COGS for Period 1, etc. Adjust cell references based on your actual layout.)

B. Input_BS Sheet (Balance Sheet)

Structure for two periods (current and prior) to calculate averages and changes for some ratios and the Cash Flow Statement (if you extend this).

Your balance sheet should be structured with sections for Current Assets, Non-Current Assets, Current Liabilities, Non-Current Liabilities, and Equity. Ensure you have line items for:

• Cash & Cash Equivalents, Accounts Receivable, Inventory
• Property, Plant & Equipment, Goodwill & Intangibles
• Accounts Payable, Short-Term Debt, Long-Term Debt
• Common Stock, Retained Earnings

Crucially, include a Balance Check row at the bottom: = Total Assets - (Total Liabilities + Total Equity). This should always be zero.

For ratios requiring averages (e.g., Avg. Total Assets), you'll use (Current_Period_Balance + Prior_Period_Balance)/2.

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III. Ratios_Output Sheet: Calculating and Interpreting Ratios

This sheet will pull data from Input_IS and Input_BS to calculate ratios. Below is a sample structure with conceptual formulas and interpretations.

Liquidity Ratios

• Current Ratio: = Total Current Assets / Total Current Liabilities. Measures ability to cover short-term liabilities.
• Quick Ratio: = (Current Assets - Inventory) / Total Current Liabilities. A stricter liquidity measure.
• Cash Ratio: = Cash & Equivalents / Total Current Liabilities. The most conservative liquidity measure.

Solvency/Leverage Ratios

• Debt-to-Equity: = Total Debt / Total Equity. Measures leverage; higher is more risky.
• Debt-to-Capital: = Total Debt / (Total Debt + Total Equity). Proportion of capital financed by debt.
• Total Debt / EBITDA: = Total Debt / EBITDA. A key leverage metric often used in credit agreements.

Coverage Ratios

• Interest Coverage (TIE): = EBIT / Interest Expense. Ability to cover interest payments from operating income.
• EBITDA Coverage: = EBITDA / Interest Expense. An alternative coverage metric.

Profitability Ratios

• Gross Profit Margin: = Gross Profit / Revenue.
• Operating Profit Margin: = Operating Income (EBIT) / Revenue.
• Net Profit Margin: = Net Income / Revenue.
• Return on Assets (ROA): = Net Income / Average Total Assets.
• Return on Equity (ROE): = Net Income / Average Total Equity.

Activity/Efficiency Ratios

• Days Sales Outstanding (DSO): = (Average Accounts Receivable / Revenue) * 365.
• Days Inventory Held (DIH): = (Average Inventory / COGS) * 365.
• Days Payables Outstanding (DPO): = (Average Accounts Payable / COGS) * 365.
• Cash Conversion Cycle (CCC): = DSO + DIH - DPO.
• Asset Turnover: = Revenue / Average Total Assets.

Note on Averages: For ratios using balance sheet items (like ROA, ROE, Turnover, DSO, etc.), it is best practice to use average balances from the beginning and end of the period.

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IV. Enhancements & Further Steps

• Trend Analysis: Calculate ratios for multiple periods to observe trends.
• Common-Size Analysis: Express IS items as % of Revenue and BS items as % of Total Assets.
• Peer Comparison: Add columns for peer company ratios for benchmarking.
• Charts: Create charts to visualize key trends.
• DuPont Analysis: Decompose ROE into its components (Profitability x Efficiency x Leverage).