Advanced Financial Ratios Every Serious Investor Should Know (Part 2)

After understanding the foundational financial ratios in our previous post, it’s time to delve deeper. Serious investors often go beyond EPS and P/E to assess a company’s operational efficiency, capital structure, and risk. These additional ratios provide powerful insights into a company’s long-term sustainability, earning quality, and competitive edge.

Whether you're refining your investment analysis or managing a diversified portfolio, these advanced ratios can enhance your stock-picking strategy and risk management approach.

1. 📉 Operating Profit Margin

• Definition: Shows the percentage of revenue that remains after covering operating expenses.

• Formula:

  Operating Margin = (Operating Profit / Revenue) × 100

• Purpose: Reflects the efficiency of core business operations before interest and taxes.

• Investor Insight:

  • Higher margin = better operational efficiency

  • Compare with peers in the same industry

2. 💼 Return on Assets (ROA)

• Definition: Indicates how efficiently a company uses its assets to generate profit.

• Formula:

  ROA = (Net Income / Total Assets) × 100

• ​Purpose: Measures overall asset utilization.

• Investor Insight:

  • Higher ROA = more efficient use of assets

  • Useful for capital-intensive sectors like manufacturing or energy

3. 🏦 Interest Coverage Ratio

• Definition: Measures how easily a company can pay interest on outstanding debt.

• Formula:

  Interest Coverage = EBIT / Interest Expense

• ​Purpose: Evaluates debt-servicing ability.

• Investor Insight:

  • Ratio < 1.5 = potential debt trouble

  • Higher ratio = safer investment during downturns

4. 💧 Quick Ratio (Acid-Test Ratio)

• Definition: Measures a company’s short-term liquidity excluding inventory.

• Formula:

  Quick Ratio = (Current Assets − Inventory) / Current Liabilities

• Purpose: Assesses immediate ability to cover short-term obligations.

• Investor Insight:

  • 1 = good liquidity position

  • < 1 = may indicate financial stress
    

5. 🏬 Inventory Turnover Ratio

• Definition: Indicates how many times a company sells and replaces its inventory during a period.

• Formula:

  Inventory Turnover = Cost of Goods Sold / Average Inventory

• Purpose: Evaluates inventory management efficiency.

• Investor Insight:

  • High turnover = strong sales or lean inventory

  • Low turnover = weak sales or overstocking

6. 🔁 Cash Conversion Cycle (CCC)

• Definition: Measures the time (in days) it takes for a company to convert inventory into cash.

• Formula:

  CCC = DIO + DSO − DPO
  (DIO = Days Inventory Outstanding, DSO = Days Sales Outstanding, DPO = Days Payables Outstanding)

• Purpose: Analyses working capital efficiency.

• Investor Insight:

  • Shorter CCC = faster cash recovery

  • Compare across industry peers

7. 🏦 Capital Adequacy Ratio (For Banks & NBFCs)

• Definition: Measures a bank’s available capital to absorb potential losses.

• Formula:

  CAR = (Tier 1 + Tier 2 Capital) / Risk Weighted Assets

• Purpose: Ensures financial stability of banks.

  Investor Insight:

  • Higher CAR = safer bank

  • Regulated minimum by RBI/Basel norms

8. 🔁 Asset Turnover Ratio

• Definition: Indicates how efficiently a company uses its assets to generate revenue.

• Formula:

  Asset Turnover = Revenue / Average Total Assets

• Investor Insight:

  • High ratio = effective asset use

  • Lower ratios may suggest under-utilization or capital inefficiency

✅ Advanced Ratio Checklist for Investors

Whether you're a long-term value investor or a short-term trader, mastering these metrics will empower you to separate quality stocks from risky ones.

Happy trading!