Understanding Financial Ratios

Five key financial ratios determine Shariah compliance: 1. Debt Ratio — Total debt divided by 36-month average market cap. Must be below 33% (S&P) or 30% (AAOIFI). 2. Receivables Ratio — Accounts receivable divided by market cap. Must be below 49% (S&P) or 45% (AAOIFI). 3. Cash & Interest-Bearing Securities — Cash plus short-term investments divided by market cap. Must be below 33%. 4. Non-Permissible Income — Revenue from prohibited sources must be below 5% of total revenue. 5. Interest Income — Interest earned must be below 5% of total revenue. Companies that fail any single ratio are marked as non-compliant.