Financial Ratios Explained: What Each One Actually Measures
A financial ratio is one figure from a company’s own reports divided by another, and that is the whole of it. There is no hidden machinery. The reason financial ratios are worth learning anyway is that raw figures do not compare: a company earning $349.3 million in a quarter and a company earning $6,024 million in a quarter cannot be ranked by those two numbers, because they are different sizes. Dividing cancels the size out and leaves the relationship, which is the part that travels.
Almost every mistake people make with ratios is a basis mistake rather than an arithmetic one. The division is easy. Choosing what goes on top and what goes underneath is where the errors live: the wrong twelve months, the wrong share count, a liability the fraction quietly left out, a dividend rate that no longer exists, a profit figure the company itself labels adjusted. A ratio quoted without its basis is not a fact. It is a number that happens to be true of some calculation nobody named.
The second thing worth knowing before any of the formulas is that the ratios are wired to each other. They are not a list of thirty independent measurements. Price to book is price to earnings multiplied by earnings over book value per share, which means a company’s valuation multiple and its return on equity are not two facts but one fact seen twice. Return on equity is net margin multiplied by asset turnover multiplied by the equity multiplier, which means a spectacular return on equity is three ordinary numbers in a row rather than a grade. Once you can see the wiring, ratios stop producing surprises.
This guide works every ratio on two real Canadian companies, using nothing but what those companies published themselves, and both identities above are checked to close on the actual filings. By the end you should be able to compute each ratio from a document, say out loud which basis you used, and name the ratios that are meaningless for the business in front of you.
The four families, and what each one is for
Everything in common use falls into four groups. The questions they answer are genuinely different, and mixing them up is the reason people argue about ratios without disagreeing about anything.
| Family | The question it asks | A typical formula | The basis you have to name | The trap |
|---|---|---|---|---|
| Valuation | What am I paying, against what I get? | Price divided by earnings per share | Which twelve months of earnings, which share count, and the date of the price | A multiple quoted with no basis is unusable, not merely imprecise |
| Profitability | How much of what comes in stays? | Profit divided by revenue, or by equity | Reported or adjusted profit, and which equity figure on which date | A high return can come from very little equity rather than a good business |
| Financial health | Could it survive a bad stretch? | Current assets divided by current liabilities | The balance sheet date, and whether lease liabilities count as debt | An obligation the fraction leaves out entirely |
| Dividend | What is it paying, and can it keep paying? | Annual dividend divided by price | Trailing declarations or the current declared rate, and which denominator for payout | A rate the company has already replaced |
Every input in all four families comes off one of three statements, and if the statements themselves are unfamiliar territory, our guide to how to read financial statements walks all of them on a single quarter of a single company, including the three checks that prove they are one document, before any division happens. Ratios are the layer immediately above that, and they inherit every ambiguity in the layer below.
The two companies, and why prices on this page are dated facts
Two businesses carry the whole guide, deliberately chosen to be as unlike each other as two large TSX companies can be.
Dollarama Inc. is the retailer. The figures are from its second quarter of fiscal 2027, the 13 weeks ended August 2, 2026, reported in the company’s own results release of September 16, 2026. Dollarama names a fiscal year by the calendar year it ends in, so this quarter carries a 2027 label and sits inside calendar 2026. Read the period description, never the label.
Royal Bank of Canada is the bank. The figures are from the quarter ended July 31, 2026, reported in the bank’s Third Quarter 2026 Supplementary Financial Information. The bank is here for a specific reason: it publishes its own return on equity, book value per share, price to book, payout ratio and market capitalisation, so every ratio computed here can be checked against the bank’s own arithmetic rather than taken on trust.
TELUS Corporation supplies the dividend arithmetic. It changed its dividend rate part way through a trailing year, and it publishes two different payout ratios for the same twelve months, which is why it carries the dividend section of this guide.
On prices, one rule applies throughout. Every price on this page is a dated historical figure taken out of a document, not a current quote, and each one says where it came from:
- Dollarama at $188.23, the weighted average price the company itself paid for 1,596,016 of its own shares during the 13 weeks ended August 2, 2026, as disclosed in that quarter’s release.
- Royal Bank at $293.41, the closing price on July 31, 2026, as printed in the bank’s own supplementary pack.
- TELUS at C$12.09, the price used in our own universe screen of September 23, 2026.
A ratio built on a price is only as current as the price, and a ratio built on a price from a document stays exactly as true as it was the day the document was published.
The habit that makes ratios work: name the basis out loud
Start here, because this single discipline prevents more errors than all the formulas combined.
Dollarama’s price to earnings ratio at $188.23 is 37.8 times. It is also 39.8 times. Neither figure is wrong and they are not approximations of each other.
The 37.8 uses diluted earnings per share for the trailing twelve months to August 2, 2026, of $4.98. The 39.8 uses the $4.73 of diluted earnings per share the company reported for its last completed fiscal year, fiscal 2026. Both are the company’s own figures. They describe different twelve-month stretches, they differ by two turns of the multiple, and a reader told only “the stock trades at 38 times” has been handed something they cannot check or reuse.
Building a trailing twelve months, and proving the method works
The trailing figure is the one to prefer, because it ends at the most recent quarter rather than wherever the fiscal year happened to stop. It is built from three numbers the company publishes:
Last full fiscal year, plus the latest interim period, minus the same interim period a year earlier.
The reason to trust that construction is that you can test it against a figure the company states independently. Dollarama publishes its own last-twelve-month EBITDA. Run the arithmetic on the EBITDA line:
| Step, in thousands of Canadian dollars | EBITDA |
|---|---|
| Fiscal 2026 full year, as reported | 2,408,226 |
| Less the first half of fiscal 2026 | (1,084,647) |
| Plus the first half of fiscal 2027 | 1,235,533 |
| Trailing twelve months to August 2, 2026 | 2,559,112 |
Source: Dollarama Inc., second-quarter fiscal 2027 results release of September 16, 2026, Selected Consolidated Financial Information.
The company’s own stated last-twelve-month EBITDA is $2,559,112 thousand. The construction reproduces it to the thousand. Having proved the method on a line the company checks for you, apply it to the rest: trailing twelve-month sales of $7,883,440 thousand, trailing net earnings of $1,365,773 thousand, and trailing diluted earnings per share of $4.98.
That $4.98 carries one honest caveat worth stating once. Each period’s per-share figure uses its own weighted average share count, so adding and subtracting per-share numbers across periods is very slightly approximate on a company whose share count is moving.
The other three bases people forget
Which share count. Dollarama’s market capitalisation here is $51,099.0 million, which is $188.23 against 271,471 thousand diluted weighted average shares for the quarter. Royal Bank’s own supplementary pack states a market capitalisation of $406,242 million, which is $293.41 against 1,384,554 thousand shares outstanding at period end, exactly. Those are two different share-count conventions, both defensible, and a comparison that silently mixes them is off by whatever the dilution and the buyback did in between.
Which equity, on which date. Return on equity divides a period’s earnings by a balance sheet figure from a single instant. Dollarama’s shareholders’ equity was $1,477,907 thousand at August 2, 2026 and $1,455,888 thousand at February 1, 2026. Every return on equity in this guide uses period-end equity, which is stated each time it appears, because a return on average equity is a different number.
Reported or adjusted. Companies publish measures that do not appear in their financial statements, and Dollarama’s adjusted net debt, met later in this guide, is one of them. Canadian rules require the reconciliation: National Instrument 52-112, the Non-GAAP and Other Financial Measures Disclosure rule, makes an issuer that publishes a measure like adjusted net debt reconcile it back to a figure that does appear in its statements. That reconciliation is where the difference between the company’s version of a ratio and a screener’s version becomes visible, which is why the rule matters to a reader and not only to an accountant.
The habit, then, is a sentence rather than a number. Not “the P/E is 37.8” but “37.8 times trailing twelve-month diluted earnings per share to August 2, 2026, against the $188.23 the company itself paid for stock during the quarter.” It is longer. It is also checkable, and the short version is not.
Valuation ratios: what you pay against what you get
Valuation ratios put a price over something the business produces or owns. None of them is high or low on its own. Each one is a statement about what the price implies, and the useful work is finding out which of them is load-bearing for the company in front of you.
The five that matter, defined
Price to earnings (P/E) is the price of one share divided by earnings per share. Read it as the number of years of current earnings the price represents. Turn it upside down and you have the earnings yield, which for Dollarama at 37.8 times is the same statement expressed as a percentage.
Price to book (P/B) is the price of one share divided by book value per share, where book value is shareholders’ equity from the balance sheet divided by the share count. Equity is what is left of the assets once everything owed has been subtracted, so book value is an accounting measure of the owners’ claim rather than a market estimate of anything. If the idea of that claim is still abstract, what a stock is and what you actually own sets out the share counts and the ownership claim that book value per share divides.
Price to sales (P/S) is market capitalisation divided by revenue. It ignores whether the revenue is profitable, which makes it blunt and occasionally the only thing available.
Enterprise value to EBITDA (EV/EBITDA) replaces the share price with the whole capital structure. Enterprise value is market capitalisation plus net debt, on the reasoning that a buyer of the entire company takes on the debt as well as the shares. EBITDA is earnings before interest, taxes, depreciation and amortisation. The ratio is popular because it compares companies with different debt loads and different tax positions, and it is the ratio most sensitive to what you decided to count as debt.
Price to earnings growth (PEG) divides the P/E by an earnings growth rate expressed as a whole number. The idea is that a higher multiple is defensible if earnings are growing faster. The catch is that the growth rate is an input you choose, and the ratio inherits all the uncertainty of that choice.
Both companies, side by side, on identical bases
| Measure | Dollarama | Royal Bank of Canada |
|---|---|---|
| Period the earnings cover | Trailing twelve months to August 2, 2026 | Trailing twelve months to July 31, 2026 |
| Price used, and what it is | $188.23, the weighted average the company paid for its own shares in the quarter | $293.41, the close on July 31, 2026, from the bank’s own pack |
| Diluted earnings per share, trailing | $4.98 | $15.87 |
| Price to earnings on that basis | 37.8x | 18.49x |
| Book value per share | $5.44 | $96.73 |
| Price to book | 34.6x | 3.03 |
| Market capitalisation | $51,099.0 million | $406,242 million |
| Share count convention | 271,471 thousand diluted weighted average | 1,384,554 thousand outstanding at period end |
Sources: Dollarama Inc., second-quarter fiscal 2027 results release of September 16, 2026; Royal Bank of Canada, Third Quarter 2026 Supplementary Financial Information, pages 4 and 5. The bank’s book value per share of $96.73 and price to book of 3.03 are the bank’s own printed figures, not ours.
For Dollarama alone, three more on the same date and the same price: price to sales of 6.48 times on trailing sales of $7,883.4 million, and enterprise value to EBITDA of either 21.0 times or 22.1 times depending on which debt figure goes into enterprise value, which is the subject of the financial health section below. On PEG, diluted earnings per share compounded at 21.4% a year from $2.18 in fiscal 2022 to $4.73 in fiscal 2026, and 37.8 divided by 21.4 gives a PEG of 1.77. Note what that figure is: a forward-looking ratio built on a backward-looking growth rate, which is the only kind of growth rate a filing can give you. Judging a growth multiple honestly is the hard part of the exercise, and it is what our ranking of Canadian growth stocks is built to do across ten TSX companies rather than one.
One of these ratios is load-bearing and one of them is noise
Look at the two price-to-book figures. The bank at 3.03 and the retailer at 34.6. The temptation is to read that as the retailer being eleven times more expensive. It is not what the numbers say.
For Royal Bank, price to book is a real measure. The bank prints its own book value per share of $96.73, its own price to book of 3.03, and across nine quarters that ratio has ranged from 1.90 to 3.03, with 3.03 the top of the range. A ratio that moves inside a stable band on a company that publishes it itself is a ratio you can read.
For Dollarama, book value per share is $5.44 against a price of $188.23, and the reason has more to do with capital returns than with the business. Across fiscal 2023 to fiscal 2026 the company spent $3,247.3 million buying back 28,588,039 of its own shares. A buyback is paid out of equity. At August 2, 2026 the equity left on the balance sheet was $1,477.9 million, which is less than half of what four years of repurchases cost. Book value per share on a company that has systematically returned more than its remaining book equity is not describing the value of the business. It is describing how much of the accounting equity has already been handed back, and dividing a price by it produces a large number that means nothing in particular.
That is the general point about valuation ratios, and it is worth more than any individual formula: a valuation ratio is only informative where its denominator is informative. Book value is informative for a company whose assets are financial and marked. It is close to meaningless for a company whose value is brand, store network and cash generation, and which has been retiring stock for years.
The identity that makes P/E and P/B one fact
Here is the wiring promised at the top. Price to book is price to earnings multiplied by earnings per share over book value per share, because the earnings term cancels:
P/B = P/E x (EPS / book value per share)
Check it on both companies.
| Company | P/E on trailing EPS | EPS / book value per share | Product | Reported P/B |
|---|---|---|---|---|
| Dollarama | 37.80 | $4.98 / $5.44407 | 34.58 | 34.6 |
| Royal Bank | 18.49 | $15.87 / $96.73 | 3.03 | 3.03, the bank’s own printed figure |
Book value per share is shown unrounded in the first row on purpose. Equity of $1,477,907 thousand over 271,471 thousand diluted weighted average shares is $5.44407, and $188.23 divided by that is 34.575. Round book value per share to the cent first, to $5.44, and the same division returns 34.60 instead. A rounding done one step too early moves the third significant figure, which is this page’s argument arriving in miniature: do the rounding last, and say what you rounded.
The second row closes on a number the bank published itself, which is the strongest kind of confirmation available: the arithmetic here and the arithmetic in the filing agree.
What the identity tells you is that earnings per share divided by book value per share is a per-share version of return on equity, so a company’s price to book and its return on equity are locked together by construction. A high price to book and a high return on equity are the same observation. Treating them as two separate reasons to like or dislike a company is double counting, and it happens constantly.
That per-share version is not identical to the return on equity printed later in this guide, and the gap is instructive. On our arithmetic $4.98 over $5.44407 is 91.5%, while trailing net earnings over period-end equity gives 92.4%. Trailing earnings per share is assembled from three periods with three different weighted average share counts, and the 92.4% divides one twelve-month earnings total by one balance sheet figure. Same company, same quarter, two defensible routes, just under a point apart.
Most people meet these ratios as fields on a quote screen rather than as divisions they performed, and our guide to reading a stock quote takes those fields apart one at a time and rebuilds a bank’s price to earnings multiple by hand from the bank’s own filing. This page is the layer above: the wiring that connects the fields to each other, and the cases in the two sections below where a difference in basis does not merely make two figures unequal but makes one of them misleading.
Profitability ratios: how much of what comes in stays
Profitability ratios divide a profit figure by something. Which something decides what question you are asking.
Gross margin is gross profit over revenue: what is left after the direct cost of whatever was sold. Operating margin is operating income over revenue: after the cost of running the business as well. Net margin is net earnings over revenue: after financing and tax, so it is what reaches the owners as a share of what customers paid.
Return on assets (ROA) is profit over total assets: how much the whole asset base produced, regardless of who funded it. Return on equity (ROE) is profit over shareholders’ equity: how much the owners’ share produced. The gap between those two is entirely a question of how much of the assets the owners funded.
Dollarama’s three margins for the 13 weeks ended August 2, 2026:
| Line, 13 weeks ended August 2, 2026, in thousands | Amount | Share of sales |
|---|---|---|
| Sales | 2,026,645 | 100.0% |
| Cost of sales | 1,125,752 | |
| Gross profit | 900,893 | 44.5% |
| SG&A | 306,668 | |
| Depreciation and amortisation | 126,769 | |
| Operating income | 517,339 | 25.5% |
| Net financing costs | 51,173 | |
| Income taxes | 116,851 | |
| Net earnings | 349,315 | 17.2% |
Source: Dollarama Inc., second-quarter fiscal 2027 results release of September 16, 2026, Selected Consolidated Financial Information. The prior-year comparative quarter, the 13 weeks to the same point in fiscal 2026, showed sales of 1,723,838 and net earnings of 321,498.
Three margins from one column, each answering a different question, and the order matters: 44.5 cents of every dollar survives the cost of the goods, 25.5 cents survives running the business, 17.2 cents reaches the bottom of the page. On the trailing twelve months to August 2, 2026 the net margin is 17.32%, which is the figure used in the decomposition below because it matches the twelve-month earnings and twelve-month sales used everywhere else on this page.
A consolidated margin can also move for reasons that have nothing to do with performance, which is why it is worth knowing what sits inside the average before reading anything into it. Our guide to how to research a stock in Canada works the same company’s segment tables and finds its consolidated gross margin and its Canadian gross margin moving in opposite directions in this exact quarter.
Return on equity, and why 92% is not a grade
Dollarama’s return on equity on trailing twelve-month earnings and period-end equity is 92.4%. Its return on assets is 16.7%.
Royal Bank’s return on equity, computed on the same basis, is 16.57%. The bank’s own stated figure for the quarter is 17.9%, and it also publishes a return on tangible common equity of 21.7% and a return on assets of 0.88%. Three different equity returns for one bank in one quarter, all correct, all on different bases. This is the reason the basis habit is not pedantry.
Now compare the two headline figures. Royal Bank’s net margin is 31.18% on trailing revenue, nearly double Dollarama’s 17.32%. And Dollarama’s return on equity is more than five times the bank’s. A reader who treats return on equity as a quality score has just concluded that the retailer is five times the business, on evidence that says the opposite about margins.
The DuPont identity, which explains it completely
Return on equity is the product of exactly three ratios:
ROE = net margin x asset turnover x equity multiplier
Where asset turnover is revenue divided by total assets, meaning how much revenue each dollar of assets generates, and the equity multiplier is total assets divided by equity, meaning how many dollars of assets sit on each dollar of owners’ money. Both are single divisions of figures on the face of the statements: Dollarama’s equity multiplier of 5.535 is total assets of $8,180,293 thousand over shareholders’ equity of $1,477,907 thousand at August 2, 2026, and its asset turnover of 0.964 is trailing twelve-month sales of $7,883,440 thousand over that same asset total. DuPont is an identity rather than a model: multiply the three and the revenue and asset terms cancel, leaving profit over equity.
| Factor, and its basis | Dollarama | Royal Bank of Canada |
|---|---|---|
| Net margin, trailing twelve months | 17.32% | 31.18% |
| Asset turnover, trailing revenue over period-end total assets | 0.964x | 0.02848x |
| Equity multiplier, period-end total assets over period-end equity | 5.535x | 18.659x |
| Product, which is return on equity | 92.4% | 16.57% |
| Return on assets | 16.7% | 0.88%, the bank’s own stated figure |
| Equity as a share of total assets | 18.1% | 5.36% |
Both rows of three multiply back: 17.32% x 0.964 x 5.535 is 92.4%, and 31.18% x 0.02848 x 18.659 is 16.57%. Identities that close are the difference between arithmetic you can rely on and a plausible-looking estimate.
Read the two columns and the whole picture reverses. The bank keeps nearly twice as much of each revenue dollar. But Dollarama turns its asset base over roughly 34 times as fast, because a retailer’s assets are inventory and stores that cycle through sales continuously while the bank’s assets are a balance sheet of $2,498,817 million producing $71,160 million of trailing revenue. The bank in turn carries 18.659 dollars of assets per dollar of common equity against the retailer’s 5.535, which is the same statement as common equity being 5.36% of assets rather than 18.1%.
So the 92.4% is not a verdict about management. It is a thin-equity retailer with fast asset turnover, and the bank’s 16.57% is a high-margin, low-turnover, high-multiplier business. Return on equity tells you what kind of business you are looking at, and only tells you how good it is once you have decomposed it. A rising return on equity driven by a rising equity multiplier is a company becoming more leveraged, which is a completely different event from the same ratio rising on a widening margin.
Return on equity is most useful where a whole peer group publishes it on a consistent basis, which in Canada means the banks. Our page on Canadian bank stocks ranks the Big Six on profitability and scale, on balance sheet strength through the CET1 ratio, on quarterly execution and on valuation, and dividend yield on its own moves no bank up that list.
Financial health ratios: could it survive a bad stretch
These ratios ask whether the company can pay what it owes. They are the family where a missing liability does the most damage, and Dollarama’s balance sheet contains the textbook case.
Current ratio is current assets over current liabilities, where current means due or realisable within twelve months. Quick ratio strips inventory out of the numerator, on the basis that inventory has to be sold before it is cash. Debt to equity is debt over shareholders’ equity. Net debt to EBITDA is debt less cash, divided by a year of EBITDA, and is read as a rough number of years of earnings before charges that the debt represents. Interest coverage is operating income over financing costs: how many times over the profit covers the cost of the borrowing.
| Measure, and its basis | Dollarama |
|---|---|
| Current ratio at August 2, 2026 | 1.55 |
| Current ratio at February 1, 2026 | 1.12 |
| Quick ratio at August 2, 2026 | 0.54 |
| Quick ratio at February 1, 2026 | 0.30 |
| Inventories as a share of current assets at August 2, 2026 | 65.3% |
| Debt to equity on total debt as the company defines it | 2.03x |
| Debt to equity once lease liabilities are added | 4.00x |
| Net debt to EBITDA on the net debt line | 0.98x |
| Adjusted net debt to EBITDA, the company’s own figure | 2.12x |
| Interest coverage, quarter’s operating income over net financing costs | 10.1x |
Sources: Dollarama Inc., second-quarter fiscal 2027 results release of September 16, 2026, balance sheet at August 2, 2026 with February 1, 2026 comparatives, and the company’s own adjusted net debt reconciliation.
A leverage ratio that doubles depending on who calculates it
Dollarama’s net debt at August 2, 2026, as the company defines it, was $2,517,007 thousand: total debt of $2,996,746 thousand less cash of $479,739 thousand. Against trailing twelve-month EBITDA of $2,559,112 thousand that is 0.98 times, which is the number a screener computes off the debt line.
The company publishes 2.12 times, and the difference is not a disagreement. It is a reconciliation the company prints itself:
| Adjusted net debt reconciliation, in thousands | Amount |
|---|---|
| Net debt as the company defines it | 2,517,007 |
| Plus lease liabilities | 2,909,442 |
| Plus unamortised debt issue costs | 10,735 |
| Less fair value hedge basis adjustment | (2,763) |
| Adjusted net debt | 5,434,421 |
| Last-twelve-month EBITDA, as stated by the company | 2,559,112 |
| Adjusted net debt to EBITDA | 2.12x |
Source: Dollarama Inc., second-quarter fiscal 2027 results release of September 16, 2026, which carries the reconciliation in full.
Almost the entire gap is one line: $2,909,442 thousand of lease liabilities, which is $392,435 thousand larger than the net debt figure it is being added to and $87,304 thousand smaller than total debt of $2,996,746 thousand. Under the leasing standard Canadian public companies apply, a signed store lease puts a right-of-use asset on one side of the balance sheet and a lease liability on the other, and Dollarama’s right-of-use assets were $2,516,850 thousand at August 2, 2026 against property, plant and equipment of $1,417,858 thousand. An obligation of that size sits outside the line called debt.
The same choice moves debt to equity from 2.03 times to 4.00 times, and it moves enterprise value to EBITDA from 21.0 to 22.1 times, because enterprise value takes whichever net debt figure you hand it.
None of the four figures is a manipulation. Two of them describe the borrowings and two describe everything the company has committed to pay. The lesson is the one the whole guide keeps arriving at: a ratio quoted without its basis is not a fact. For any company that leases a lot of floor space, and that means retailers and restaurant groups, check whether the leverage figure in front of you includes leases before comparing it to anything.
The current ratio moved from 1.12 to 1.55 without anything happening
Dollarama’s current ratio was 1.12 at February 1, 2026 and 1.55 at August 2, 2026. Read as a trend, that looks like a company whose liquidity improved 38% in six months. Read as what it is, it is two photographs of a seasonal balance sheet: current liabilities fell from $1,348,179 thousand to $1,080,653 thousand while current assets rose from $1,508,355 thousand to $1,677,492 thousand, and a retailer’s working capital is not the same in early February as in early August.
A single-date ratio compared across two dates in a seasonal business measures the calendar as much as the company. The fix is to compare the same point in successive years rather than consecutive quarters, and to say which date you used.
A current ratio of 1.55 hiding a quick ratio of 0.54
The more useful pair is the current ratio against the quick ratio on the same date. At August 2, 2026 those were 1.55 and 0.54, and the reason is that inventories of $1,096,123 thousand were 65.3% of the $1,677,492 thousand of current assets.
The current ratio says near-term assets cover near-term bills half again over. The quick ratio says that if the inventory could not be turned into cash, the remaining current assets would cover barely half of the current liabilities. Neither is an alarm on a business that sells its inventory continuously, and interest coverage of 10.1 times for the quarter, operating income of $517,339 thousand over net financing costs of $51,173 thousand, says the cost of the borrowing is comfortably covered by the profit. But a current ratio quoted alone on an inventory-heavy business conceals exactly the thing a liquidity ratio is supposed to reveal. Always compute both, and always say which date they sit on.
Dividend ratios: what it pays, and whether it can keep paying
Dividend ratios look like the simplest family and contain the most mechanically interesting problem in the subject.
Dividend yield is the annual dividend per share divided by the price. Payout ratio is the dividend divided by whatever the company is paying it out of. Coverage is that same relationship the other way up. Dividend growth is the rate at which the declared amount has been rising.
Three separate things can go wrong, and they are worth taking one at a time because they are different failures with different fixes: the two halves of a yield can describe different points in time, a payout ratio can be computed against several defensible denominators, and a yield says nothing at all about the rate at which a dividend is growing.
A trailing yield is a fraction whose two halves belong to different dates
This is the mechanism, and it is arithmetic rather than judgement.
A trailing dividend yield puts the sum of the last four declared dividends on top and a price from one particular day underneath. The numerator therefore describes twelve months that are finished. The denominator describes a single moment. The fraction is only coherent if nothing about the dividend changed across those twelve months, because if it did, the top of the fraction is a blend of an old policy and a new one while the bottom is entirely current.
TELUS Corporation supplies the arithmetic cleanly. On July 30, 2026 it declared a quarterly dividend of $0.1875 per share, an annualised $0.75, against a prior annualised rate of $1.6736. Its last four declarations therefore sum to $1.4427, which decomposes exactly:
| The trailing sum, decomposed | Amount |
|---|---|
| Three declarations at the prior quarterly rate, $0.4184 each | $1.2552 |
| One declaration at the new quarterly rate | $0.1875 |
| Sum of the last four declarations | $1.4427 |
| The rate declared July 30, 2026, annualised, four times $0.1875 | $0.75 |
Source: TELUS Corporation Notice of Cash Dividend dated July 30, 2026 and the second quarter 2026 news release, both filed as Exhibit 99.1 to a Form 6-K on July 31, 2026.
Three of those four declarations were made at a rate the company has replaced. Against the C$12.09 price used in our own universe screen of September 23, 2026, the trailing sum produces a yield of 11.93% and the rate declared July 30, 2026 produces 6.20%.
Watch what the arithmetic does next, because this is the part worth carrying to any company. Each new declaration at $0.1875 replaces one $0.4184 in the trailing sum. The numerator therefore falls in three more steps, and only after the fourth declaration at the new rate does the trailing sum equal the annualised declared rate and the two yields converge. A trailing yield after any change to a dividend rate is a weighted blend of the old rate and the new one, and it takes a full four quarters to stop being one. The direction of the error follows directly: after a cut the trailing figure is too high, and after an increase it is too low, in proportion to how much of the old rate is still inside the four quarters.
The fix costs one line in the most recent dividend notice, and the habit is to state which basis you used. A yield quoted as “the declared quarterly rate annualised, against a price on this date” cannot be wrong about anything except the price.
A payout ratio without its denominator named is not a number
The second failure has nothing to do with dates. It is that a dividend can honestly be divided by several different things.
TELUS publishes two payout ratios for the same twelve months to June 30, 2026, side by side in the notes to its condensed interim consolidated financial statements.
| Denominator, same company, same twelve months to June 30, 2026 | Payout ratio |
|---|---|
| Free cash flow, net of dividend reinvestment plan effects | 74% |
| Cash from operating activities less capital expenditures, the IFRS-comparable basis | 109% |
Source: TELUS Corporation, condensed interim consolidated financial statements at June 30, 2026, Note 3.
One of those is comfortably under 100% and the other is over it, which in ordinary reading is the difference between a dividend covered by the business and one that is not. Both are the company’s own published figures for the same twelve months. Nothing has been manipulated. Two different denominators produce two different fractions, and neither one of them is “the payout ratio”.
What rescues the measure is that the company also states the standard it holds itself to. Its stated objective range for the payout ratio on its common shares is 45% to 60% of free cash flow on a trailing twelve-month basis, shifted from 60% to 75% of free cash flow on a prospective basis.
That objective is more useful than either ratio, because it names a denominator (free cash flow), a period (trailing twelve months) and a band. It makes the 74% checkable against something the company committed to, rather than against another company’s ratio computed on a base nobody stated. The fair comparison for a payout ratio is a company against the target it sets for itself, and the second-best comparison is two companies whose denominators you have personally confirmed match. Anything else compares definitions.
Applied across a whole list, that is why our page on high-yield Canadian dividend stocks ranks its companies on payout coverage and shows the coverage test for each one, rather than sorting on headline yield, so the ordering survives the two problems above instead of being produced by them.
Yield tells you nothing about growth, and growth is the other half
The third failure is the one people notice last. A yield is a snapshot of a rate. It carries no information about the direction that rate has been moving, and two companies with very different yields can be making completely different offers.
| Company | Declared quarterly rate, and the date declared | Yield, and its basis | Payout ratio, and its basis |
|---|---|---|---|
| Dollarama | $0.1200, declared September 16, 2026 | 0.26%, four times $0.12 against the $188.23 the company paid for its own shares in the quarter | 9.3% of the quarter’s $1.29 of diluted EPS, and 8.9% of fiscal 2026 reported EPS |
| Royal Bank of Canada | $1.76 for the quarter ended July 31, 2026 | 2.5%, the bank’s own stated figure | 41%, the bank’s own stated figure. Our own trailing arithmetic gives 41.3% |
| TELUS | $0.1875, declared July 30, 2026, annualising to $0.75 from a prior annualised $1.6736 | 6.20% on that declared rate at C$12.09, or 11.93% on the last four declarations | 74% of free cash flow net of dividend reinvestment plan effects, or 109% of cash from operations less capital expenditure |
Sources: each company’s own filing as cited above.
Now add the growth rates, which the yields conceal completely. Dollarama’s dividends per share compounded 20.4% a year from $0.2012 in fiscal 2022 to $0.4232 in fiscal 2026, while paying out 8.9% of fiscal 2026 earnings per share. Royal Bank’s declared quarterly dividend went from $1.42 two years earlier to $1.54 a year earlier to $1.76 for the quarter ended July 31, 2026, a rise of 23.9% across eight quarters, at a payout of 41%.
Those are two genuinely different propositions and neither is better in the abstract. A 0.26% yield at 9.3% of the quarter’s earnings is a company handing back almost nothing in cash and keeping the rest: fiscal 2026 dividends came to about $117.1 million, which is our arithmetic on two stated figures, $0.4232 per share against 276.684 million diluted weighted average shares, against $834.2 million of fiscal 2026 buybacks, making repurchases 7.1 times the dividend. A 2.5% yield at a 41% payout is a company committing to a substantial cash distribution and still retaining the majority of its earnings.
Which one a long holder ends up preferring is an arithmetic question rather than a matter of taste, and it turns on how many years the comparison runs: a small yield growing at 20.4% a year and a larger one growing more slowly cross over at a point you can calculate, which is the machinery our guide to compounding works through. The practical version is to write down both figures and never the yield alone.
Two last things belong with any dividend ratio, because a yield is a percentage and not an income. What a stated rate actually pays on a given position size is what our dividend income calculator exists to work out. And what arrives in a hand depends on the account and the tax treatment, since an eligible Canadian dividend, interest and a capital gain are taxed three different ways, which how investment income is taxed in Canada works through to the dollar. A 6.20% dividend yield and a 6.20% interest rate are not the same offer.
The ratios that do not apply, and what replaces them
The most advanced ratio skill is knowing which ones to refuse to compute.
Three of the ratios above cannot meaningfully be computed for a bank. There is no gross margin, because there is no cost of goods sold sitting between revenue and the cost of running the business. There is no useful current ratio, because a bank’s balance sheet is not organised into things that turn into cash within a year against bills due within a year in the way a retailer’s is. And enterprise value to EBITDA does not work, because net debt is not an incidental part of a bank’s funding that a buyer would pay off. Computing them anyway produces numbers you can print and cannot use.
The sector publishes its own ratios instead, and Royal Bank’s supplementary pack states every one of them.
| Ratio that does not transfer | What the sector reports instead | What it measures | Royal Bank, quarter ended July 31, 2026 |
|---|---|---|---|
| Gross margin | Efficiency ratio | Non-interest expense as a share of total revenue, so lower is better | 52.8% |
| Current ratio | Common Equity Tier 1 ratio | The highest-quality capital against risk-weighted assets | 13.5% |
| Debt to equity | All-in leverage ratio | Capital against total exposures, without risk weighting | 4.3% |
| Return on equity, unadjusted | Return on tangible common equity | The same return with intangible assets removed from the denominator | 21.7% |
| Inventory or receivable quality measures | Provision for credit losses on loans | The charge taken for expected loan losses, as a percentage of average net loans and acceptances | 0.36% |
Source: Royal Bank of Canada, Third Quarter 2026 Supplementary Financial Information, pages 4 and 5. Every figure in the right-hand column is the bank’s own stated measure.
The efficiency ratio is the one to internalise, because it is the closest thing a bank has to a margin and it runs the opposite way: 52.8% means 52.8 cents of every revenue dollar went on expenses, so a falling efficiency ratio is improvement. Non-interest expense of $9,789 million against total revenue of $18,538 million produces it directly.
The two capital ratios are not the bank’s own invention. Common Equity Tier 1 is defined by the banking regulator, and the definition sits in OSFI’s Capital Adequacy Requirements guideline, which is why a CET1 ratio is comparable between two Canadian banks in a way that two companies’ adjusted earnings are not.
The general principle extends past banks. Before computing any ratio, ask whether its denominator describes something the business actually has. A company with no inventory has no meaningful quick ratio distinct from its current ratio. A company with negative book equity has no interpretable price to book. A company whose profits come partly from an investment whose revenue is not in revenue has a net margin that is not measuring what it looks like. The ratio will compute. That is not the same as it meaning something.
Five mistakes, with what each one costs
Each of these is visible in the numbers above, and each has a real figure attached.
Quoting a trailing yield after a rate change. TELUS at 11.93% on the last four declarations against 6.20% on the rate declared July 30, 2026, both at C$12.09, because three of those four declarations were made at a rate of $0.4184 that has been replaced by $0.1875. The cost is buying an income based on money that will not be paid again. The fix is the most recent dividend notice.
Computing leverage without the leases. Dollarama at 0.98 times net debt to EBITDA against the company’s own 2.12 times adjusted net debt to EBITDA, a gap that is almost entirely $2,909,442 thousand of lease liabilities. The cost is concluding that a company with substantial committed rent has almost no leverage. The fix is to read the company’s own reconciliation, which it is required to publish.
Reading return on equity as a quality score. Dollarama at 92.4% against Royal Bank at 16.57% on the same basis, while the bank keeps nearly twice as much of each revenue dollar. The cost is ranking businesses on a number that is mostly telling you how much equity is in the denominator. The fix is the DuPont split, which takes two minutes and turns one number into three.
Comparing payout ratios computed on different denominators. TELUS publishes 74% and 109% for the same company in the same twelve months, on free cash flow net of dividend reinvestment plan effects and on cash from operations less capital expenditure respectively. The cost is a comparison that measures definitions rather than companies. The fix is to name the denominator every time, and to test a company against its own stated objective first.
Quoting a current ratio on an inventory-heavy business. Dollarama at 1.55 with a quick ratio of 0.54 on the same date, because inventories were 65.3% of current assets. The cost is mistaking stock on shelves for liquidity. The fix is to compute both and to state the balance sheet date, since the same company read 1.12 and 0.30 six months earlier on nothing but the seasonal calendar.
A sixth belongs here because it sits underneath all five: taking a ratio from a source that did not tell you its basis. Every figure on this page is either lifted from a document one of these companies published, or labelled as our own arithmetic, or carries the basis it was computed on. The C$12.09 price comes from our screen of September 23, 2026 and says so. The trailing twelve-month lines, the 41.3% payout, the $117.1 million of fiscal 2026 dividends, the 7.1 times ratio and the PEG are ours and say so too. A ratio arriving without that information cannot be checked, and a ratio that cannot be checked is not evidence.
A routine that fits on one page
Do these in order on any company, writing the basis beside each answer. Nothing here needs a subscription or a spreadsheet.
First, fix the periods.
- Write down the exact dates the latest reported period covers, from the period description rather than the fiscal-year label.
- Build trailing twelve-month revenue, earnings and earnings per share: last full fiscal year, plus the latest interim period, minus the same interim period a year earlier. If the company states its own last-twelve-month figure for any line, run your construction on that line first and check it matches.
- Write down the balance sheet date, and note that every balance sheet ratio below belongs to that single day.
Then the four families, in this order.
- Profitability first, because it is the least ambiguous: gross, operating and net margin from one column of the income statement, each as a share of revenue.
- Return on assets, then return on equity, then immediately split the return on equity into net margin, asset turnover and equity multiplier. Multiply them back to confirm the split closes. Note which of the three is doing the work.
- Financial health next: current ratio and quick ratio on the same date, debt to equity, and net debt to EBITDA. Then find the lease liability and recompute the last two with it included. Note both answers.
- Interest coverage: operating income over financing costs, on the period you named in step 1.
- Dividends: take the most recently declared rate rather than the trailing sum, annualise it, and divide by a price whose date you write down. Then the payout ratio, naming its denominator explicitly, and beside it the growth rate of the declared dividend over four or five years.
- Valuation last, because it is the only family that needs a price and the only one that changes when nothing about the business has. Price to earnings on the trailing figure from step 2, price to book, and price to sales. Check the identity: price to earnings multiplied by earnings per share over book value per share should reproduce price to book, and do the rounding only at the end.
Then the refusals.
- Go back through the list and cross out every ratio whose denominator does not describe something the business has. For a bank that removes gross margin, the current ratio and enterprise value to EBITDA, and adds the efficiency ratio, the capital ratios, return on tangible common equity and the provision for credit losses.
- Write one sentence for each surviving ratio, in the form “37.8 times trailing twelve-month diluted earnings per share to August 2, 2026, at the $188.23 the company paid for its own shares during the quarter”. If you cannot write the sentence, you do not yet know the ratio.
Steps 1 to 3 are where the accuracy comes from. Step 10 is where the judgement is. Step 11 is the one people skip, and it is the one that makes the other ten worth having.
Common questions about financial ratios
What is a good price to earnings ratio?
There is no threshold. Dollarama at 37.8 times trailing twelve-month diluted earnings per share and Royal Bank at 18.49 times on the same basis are not a ranking, because a multiple states what a price implies rather than measuring the business. The useful comparison is a company against its own history and against companies whose economics genuinely resemble it, and only once you know which twelve months each figure uses. Dollarama itself reads 37.8 times on trailing earnings to August 2, 2026 and 39.8 times on its last completed fiscal year, from the same price and the same filings.
Can I compare ratios between two different industries?
Some of them carefully, and several not at all. Net margin, return on assets and return on equity can be computed for almost any company, and comparing them across industries is informative provided you decompose them first: Royal Bank’s 31.18% net margin and Dollarama’s 92.4% return on equity are both real and point in opposite directions. Gross margin, the current ratio and enterprise value to EBITDA do not transfer to a bank at all. The safe rule is that valuation and liquidity ratios compare within a sector, and profitability ratios compare across sectors only once split into their factors.
Why do two sources show a different dividend yield for the same company?
Almost always because one divides the sum of the last four declared dividends by the price while the other divides the current declared rate annualised. On a steady payer they agree. TELUS declared $0.1875 for the quarter on July 30, 2026, an annualised $0.75, and its last four declarations summed to $1.4427, being $0.4184 three times plus $0.1875 once. At the C$12.09 price used in our September 23, 2026 screen, that is 11.93% on the trailing sum against 6.20% on the declared rate. Only the second describes what will actually be paid.
What does it mean when a payout ratio is above 100 per cent?
It means the dividend exceeded whatever sat in the denominator over the period measured, which makes the choice of denominator decisive rather than technical. TELUS published both 74% and 109% for the same twelve months to June 30, 2026 in the same note: 74% on free cash flow net of dividend reinvestment plan effects, and 109% on the IFRS-comparable basis of dividends declared over cash from operating activities less capital expenditures. Before reacting to any payout ratio, find out which denominator produced it and whether the company states an objective range of its own to measure it against.
Which ratio should I compute first?
Margins, because they need only one column of the income statement and carry the least ambiguity about basis. Then return on equity with its DuPont split, because that tells you what kind of business you are holding: Dollarama’s 92.4% comes from a 17.32% net margin, 0.964 times asset turnover and a 5.535 times equity multiplier, while Royal Bank’s 16.57% comes from 31.18%, 0.02848 and 18.659. Valuation last, since it is the only family that depends on a price, and a price changes without anything about the company changing.
What is the difference between return on equity and return on assets?
Return on assets divides profit by everything the company controls regardless of who funded it. Return on equity divides the same profit by the owners’ share alone. The gap between them is leverage, precisely. Dollarama’s 16.7% return on assets becomes a 92.4% return on equity because total assets are 5.535 times equity. For Royal Bank the same multiplication needs a return on assets built on the same basis: our own arithmetic on two stated figures, trailing twelve-month net income to common of $22,187 million over period-end total assets of $2,498,817 million, gives 0.8879%, and 0.8879% times 18.659 is 16.57%. The bank’s own stated 0.88% is a quarterly figure on average assets, a different basis entirely, and it does not multiply back. That is this page’s whole argument turning up inside its own arithmetic.
Should I use a company’s reported figures or its adjusted ones?
Read both, and never mix them inside one comparison. Adjusted measures are not automatically the flattering ones, and Canadian issuers must reconcile any such measure back to a figure that appears in their financial statements under National Instrument 52-112. Dollarama’s adjusted net debt of $5,434,421 thousand is more than double its net debt of $2,517,007 thousand, which makes its own leverage ratio look worse rather than better: 2.12 times EBITDA against 0.98 times. Read what was added or removed and decide whether you agree. The reconciliation exists so that you can.
Is a current ratio above 1.0 enough?
Not on its own. Dollarama’s 1.55 at August 2, 2026 sits over a quick ratio of 0.54 on the same date, because inventories of $1,096,123 thousand were 65.3% of the $1,677,492 thousand of current assets. The current ratio says the near-term assets cover the near-term bills. The quick ratio says how much of that depends on selling inventory first. For a business that sells inventory continuously the pair is unremarkable. For one whose inventory moves slowly the same pair would be a warning, and the current ratio alone would not show it.
Three things to keep
If nothing else survives from this page, these three do, and they are enough to make any ratio you meet usable.
A ratio is a sentence, not a number. Every figure here carries its period and its basis, or else says whose arithmetic it is, because 37.8 times and 39.8 times are the same company at the same price, and 11.93% and 6.20% are the same dividend on the same day. A number without its basis cannot be checked, and an unverifiable number is not evidence no matter how precise it looks.
The fractions are wired together. Price to book is price to earnings times earnings over book value per share, and it closed on both companies once the rounding was left to the end, one of them against a figure the company published itself. Return on equity is net margin times asset turnover times the equity multiplier, and it closed on both. An identity that closes is proof you have the arithmetic right. A ratio that appears to contradict another usually means one of the two was computed on a basis nobody wrote down.
Know which ratios to refuse. The skill is not computing thirty of them. It is deciding which five describe the business in front of you, naming the basis of each, and leaving the rest alone.
The figures on this page describe Dollarama Inc.’s second quarter of fiscal 2027, the 13 weeks ended August 2, 2026, reported September 16, 2026; Royal Bank of Canada’s third quarter of 2026, the quarter ended July 31, 2026; and TELUS Corporation’s dividend declaration of July 30, 2026, with payout figures for the twelve months to June 30, 2026. All three companies are teaching material here rather than recommendations, and every price used is a dated figure from one of those documents or from our own dated screen, rather than a current market quote.