How to Calculate Ratios in Excel

Today, in this article we will show you how to Calculate Ratios in Excel. The quantitative relationship between two positive numeric values is communicated through the use of a ratio, which indicates the number of times that one number contains the other. It is more likely that you are accustomed to seeing ratios expressed as fractions, such as 1:3, which holds the equivalent of 1/3.

Ratios are utilized extensively in the field of mathematics and even in the realm of business, whether they are expressed as a fraction, a decimal, or with the ratio symbol. When it comes to analysis, the concept of ratios is of the utmost importance. You may be familiar with financial ratios (such as liquidity, profitability, and efficiency ratios) in the business world, win/loss ratios in sports and games, or a simple ratio for quantitative measures in baking, measurement, and other areas.

Excel has not yet been updated to include a function or feature that allows users to calculate ratios on their own. In spite of this, we are able to navigate our way around Excel by employing specific functions as components of straightforward formulas. In this lesson, we will demonstrate four different ways How to Calculate Ratios in Excel. These methods include the division method, the GCD function, the SUBSTITUTE & TEXT function, and the ROUND function.

What Is Ratio?

When comparing two or more numbers, it is possible to use a ratio to express the relative values of the numbers being compared. It is through division that the ratio is able to accomplish this. This particular number is referred to as the antecedent, and the other number is referred to as the consequent. The antecedent is going to be divided.

It is common practice to express ratios using the expression a:b, where a and b can be either integers, decimals, or even fractions themselves. We are able to gain a relatively simpler comprehension of the comparison between two variables or numbers through the utilization of ratio values. On the other hand, from a mathematical standpoint, they are essentially the same thing as division. Nevertheless, the expression is not the same.

How to Calculate Ratios in Excel

Simple Division Method

1. Type the first number in a cell (for example, A1).
2. Type the second number into a different cell, like B1.
3. Type =A1/B1 into the cell (like C1) where you want the ratio to appear.
4. Type “Enter.” Excel will show the difference between the two numbers.

Using the GCD Function

1. Put the formula =GCD(A1,B1) in a different column, say D1. This finds the largest common divisor (GCD) of the two numbers in cells A1 and B1.
2. Type =A1/D1 & ":" & B1/D1 into the cell (like C1) where you want the ratio to appear. The & sign combines text and numbers, and the colon (:) makes it easier to read.
3. Type “Enter.” With a colon between each number, Excel will show the ratio in its simplest form.

Using Custom Number Formatting

1. Pick out the cell (like C1) where you want the ratio to show up.
2. Pick “Format Cells” from the menu that comes up when you right-click on the cell.
3. Click on the “Number” tab in the “Format Cells” window.
4. Tap “Custom” on the “Category” menu.
5. Type this code into the “Type” box: $0.00 (you can change the number of decimal places if you need to).
6. Type “Enter.”

Understanding the Importance of Ratios in Financial Analysis

1. Profitability Analysis: Gross profit margin, operating profit margin, and net profit margin are some of the profitability ratios that show how well a company can make money compared to its costs and income. These ratios help investors and other important people figure out how profitable a company is and how well it handles costs.
2. Evaluation of Efficiency: Ratios like the asset turnover ratio and the inventory turnover ratio show how well a business uses its assets and stock to make sales. Higher turnover ratios mean that assets are being used more efficiently, which can help a business make more money.
3. Debt Management: The debt-to-equity ratio and the interest coverage ratio show how much debt a company has and how well it can handle its debt obligations. Lower debt ratios mean less financial risk, while higher interest coverage ratios mean the company can pay its debts more easily.
4. Making Investment Decisions: Financial ratios help investors decide what investments to make. Investors can compare a company’s performance to industry standards and find possible investment opportunities or risks by looking at its financial ratios.
5. Performance of Management: Ratios help you judge how well management is using resources and meeting financial goals. Ratios that keep going up over time may be a sign of good management and strategic decision-making.
6. Forecasting and Planning: Financial ratios can help you predict how well a business will do in the future and plan how it will run. By looking at past trends and current ratios, businesses can find places to improve and come up with plans to make their finances better.

Advanced Tips and Tricks for Ratio Analysis in Excel

1. Custom Functions: Create custom functions using Visual Basic for Applications (VBA) to perform complex ratio calculations or automate repetitive tasks, saving time and increasing efficiency in your analysis.
2. Slicers and Timelines: Use slicers and timelines to filter and visualize your data dynamically, enabling you to focus on specific time periods or categories in your ratio analysis.
3. Data Tables: Set up data tables to perform sensitivity analysis and scenario planning, allowing you to assess the impact of different variables on your ratios and make informed decisions.
4. Charts and Graphs: Create charts and graphs to visually represent your ratio analysis, making it easier to communicate key findings and insights to stakeholders.
5. Error Checking: Use Excel’s built-in error checking features to identify and resolve any errors in your ratio calculations, ensuring the accuracy and reliability of your analysis.
6. Documentation: Document your ratio analysis process, including assumptions, methodologies, and sources of data, to provide transparency and ensure reproducibility of your results.

Conclusion

We are able to visualize the relative size between two or more variables or numbers by using ratios. In addition, we have to deal with ratios as a significant part of our work in Excel. What are the steps that we need to take in order to calculate the ratio between two numbers in Excel and then determine the percentage? We will discuss this topic here with sufficient explanations.

Questions and Answers