From a trial balance
Trial balance to ratio analysis
Every common financial ratio can be worked out from one trial balance once it is grouped into a profit and loss and a balance sheet: margins from the profit and loss, liquidity from current assets and liabilities, working capital days from debtors, creditors and stock against sales and cost of sales, and gearing and returns from the two together.
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Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.
Eleven ratios from one workshop's trial balance
The invented furniture workshop from trial balance to balance sheet, for its year to 31 March 2026:
| Ratio | Formula | Workshop |
|---|---|---|
| Gross margin | Gross profit ÷ sales | 47.0% |
| Operating margin | Operating profit ÷ sales | 8.5% |
| Pre-tax margin | Profit before tax ÷ sales | 8.0% |
| Current ratio | Current assets ÷ current liabilities | 2.65 |
| Quick ratio | (Current assets − stock) ÷ current liabilities | 1.79 |
| Debtor days | Trade debtors ÷ sales × 365 | 42 days |
| Creditor days | Trade creditors ÷ cost of sales × 365 | 47 days |
| Inventory days | Stock ÷ cost of sales × 365 | 54 days |
| Interest cover | Operating profit ÷ interest | 16.3 times |
| Gearing | Borrowings ÷ capital and reserves | 28.1% |
| Return on capital employed | Operating profit ÷ (capital and reserves + borrowings) | 30.0% |
The figures behind them: sales £401,000, gross profit £188,600, operating profit £34,200, profit before tax £32,100, current assets £96,600 of which stock £31,200, current liabilities £36,500, interest £2,100, borrowings £25,000, capital and reserves £89,100.
Three steps from a trial balance to ratio analysis
- Group the trial balance into the two statements. A profit and loss and a balance sheet; every ratio takes its figures from one or both.
- Take both halves of each ratio from the same period. A year's sales against the year-end debtors, or for a monthly report, three months' sales and those months' days.
- Set each ratio against something. Last year, the budget, the terms you agreed, or businesses like yours. A ratio on its own says little.
What the eleven ratios say about the workshop
- It makes money on what it sells, at 47.0% gross margin, but keeps only 8.5% after overheads: wages take the most.
- It can pay its bills: a current ratio of 2.65, and 1.79 even without the stock.
- Customers take about 42 days to pay, or about 35 once VAT is taken out of debtors, if all its sales carry 20%. Against 30-day terms, worth chasing.
- Stock covers 54 days of cost of sales, longer than suppliers wait to be paid, so the stock is paid for before it is sold.
- Borrowing is light: interest is covered 16.3 times, and gearing is 28.1%.
Debtors include VAT and sales do not
The debtor balance in a trial balance is what customers owe, tax included; sales in the profit and loss are net of it. Dividing one by the other overstates debtor days by roughly the tax rate, about a fifth at 20% VAT. Take the tax out of debtors, or say that it is in, and do it the same way every time. Creditor days has the same trap.
Magic MIS computes the ratios from every month's trial balance
Every month the workbook shows gross margin and EBITDA margin beside the profit and loss, and the current ratio, quick ratio, debtor days, creditor days, inventory days and cash conversion cycle on a sheet of their own, with the days ratios worked over the last three months. Operating margin, interest cover and more are one request away in the KPI library. A ratio whose denominator is zero or negative is shown as not meaningful rather than as a number, and on the board every ratio opens to the accounts behind it. Prepaid credits, no subscription, and every action shows its price before it runs: see the credit packs.
What people ask about ratio analysis from a trial balance
Can you do ratio analysis from a trial balance?
Yes, once the trial balance is grouped into a profit and loss and a balance sheet. Every common ratio uses figures from one or both.
Which ratios matter most for a small business?
Gross margin, the current ratio, debtor days and cash: whether it makes money on what it sells, can pay its bills, and is paid on time.
Should ratios use year-end or average balances?
Average balances are fairer when a business is growing or seasonal. Year-end balances are simpler and fine if they are used the same way every time.
What if a ratio's denominator is negative?
Then the ratio means nothing, such as a margin on negative sales. Show it as not meaningful rather than as a number.
Read next
- KPIs and ratios for a monthly MIS: formulas and what they tell youThe ratios a monthly MIS or management accounts pack should carry — margins, debtor, creditor and inventory days, cash conversion cycle, current and quick ratio — with formulas.Read
- How do you calculate the current ratio?Current ratio = current assets ÷ current liabilities at the month end. The formula, a worked example, what a healthy ratio looks like, and the quick ratio beside it.Read
- How do you calculate debtor days?Debtor days = trade receivables ÷ the last three months' revenue × the days in them. A worked example, why three months beats one or twelve, and the GST effect nobody mentions.Read
Have every ratio computed from your trial balance
Create an account, load last month's trial balance, and get the report — paid per action.
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