Financial Ratios: Essential Guide

Financial ratios convert raw financial statement data into comparable metrics. They are the building blocks of quantitative fundamental analysis. This guide covers the key ratios used across QuanterLab's screening and research modules.

Valuation Ratios

Valuation ratios compare a stock's market price to its financial output. They answer: "How much am I paying for each dollar of earnings, assets, or cash flow?"

Price-to-Earnings (P/E)

P/E = Market Price per Share / Earnings per Share (EPS) TTM P/E uses trailing twelve months earnings Forward P/E uses analyst consensus estimates

A low P/E suggests the market is pricing the stock cheaply relative to its earnings. But context matters — cyclical stocks often have low P/E at peak earnings (right before a downturn) and high P/E at trough earnings (right before a recovery).

Price-to-Book (P/B)

P/B = Market Price per Share / Book Value per Share Book Value = Total Assets - Total Liabilities

P/B compares market value to accounting value. A P/B below 1.0 means the market values the company below its net asset value. Most useful for asset-heavy businesses (banks, industrials). Less meaningful for tech companies where value lies in intangible assets.

EV/EBITDA

Enterprise Value = Market Cap + Total Debt - Cash EV/EBITDA = Enterprise Value / EBITDA

Preferred over P/E for comparing companies with different capital structures because it is debt-neutral. EBITDA strips out financing and accounting decisions, showing core operational profitability.

Free Cash Flow Yield

FCF Yield = Free Cash Flow per Share / Market Price per Share Free Cash Flow = Operating Cash Flow - Capital Expenditures

Arguably the most important valuation metric. Cash flow is harder to manipulate than earnings. A high FCF yield means you are paying less for each dollar of actual cash the business generates.

Inverting Valuation Ratios

In the Multi-Factor Screener, valuation ratios are inverted for scoring: a lower P/E produces a higher score. This ensures that "higher score = better" is consistent across all metrics.

Quality Ratios

Quality ratios measure how efficiently a company converts inputs (capital, assets, revenue) into outputs (profits, cash flow, shareholder value).

Return on Equity (ROE)

ROE = Net Income / Shareholders' Equity Measures how much profit a company generates per dollar of equity

High ROE indicates efficient use of shareholder capital. However, ROE can be artificially inflated by high debt (which reduces equity). Always check alongside debt ratios.

Return on Invested Capital (ROIC)

ROIC = NOPAT / Invested Capital NOPAT = Net Operating Profit After Tax Invested Capital = Total Equity + Total Debt - Cash

ROIC is debt-neutral and more reliable than ROE for comparing companies with different capital structures. A company with ROIC consistently above its cost of capital is creating value.

Margin Ratios

Gross Margin = (Revenue - COGS) / Revenue — Measures pricing power and cost efficiency
Operating Margin = Operating Income / Revenue — Includes SG&A and R&D; shows operational efficiency
Net Margin = Net Income / Revenue — The bottom line after all expenses, taxes, and interest

Rising margins over time suggest improving efficiency or pricing power. Declining margins may signal competitive pressure or cost inflation.

Debt and Coverage

Debt-to-Equity = Total Debt / Shareholders' Equity — Lower is generally safer. Above 2.0 is considered high for most industries
Current Ratio = Current Assets / Current Liabilities — Measures short-term liquidity. Above 1.5 is comfortable; below 1.0 is a warning
Interest Coverage = EBIT / Interest Expense — How many times over the company can cover its debt payments. Below 2.0 is risky

Sector Context

Financial ratios vary dramatically by sector. Banks have high D/E ratios by design. Tech companies have high P/E ratios due to growth expectations. Always compare within sector peers, not across the entire market. The screener's Z-score normalization handles this partially, but sector exclusion can improve results.

Growth Metrics

Revenue Growth (YoY) — Year-over-year top-line growth. The most fundamental growth metric
EPS Growth (YoY) — Earnings per share growth. Can be driven by revenue growth, margin expansion, or share buybacks
3-Year CAGR — Compound Annual Growth Rate smooths out year-to-year volatility. More reliable than single-year growth for identifying consistent growers
FCF Growth — Free cash flow growth. Validates that earnings growth is backed by actual cash generation
Book Value Growth — Growth in net asset value per share. Indicates retained earnings and capital accumulation

The Piotroski F-Score

A composite scoring system that awards one point for each of nine binary tests:

Piotroski's 9 Signals

Profitability (4 points) — Positive ROA, positive operating cash flow, improving ROA year-over-year, and cash flow exceeding net income (accruals quality)
Leverage & Liquidity (3 points) — Decreasing long-term debt ratio, improving current ratio, no new share dilution
Operating Efficiency (2 points) — Improving gross margin, improving asset turnover

Stocks scoring 8-9 have strong fundamentals across all dimensions. Stocks scoring 0-2 show widespread weakness. Research shows that high F-Score stocks outperform low F-Score stocks by 7-10% annually, particularly among value stocks.