Short Ratio

Short Ratio is a financial metric that indicates the proportion of a company’s outstanding shares that are currently sold short.

Definition of Short Ratio

The Short Ratio, also known as the Short Interest Ratio, is a measure used to determine how many days it would take for short sellers to cover their positions based on the stock’s average daily trading volume. This ratio provides insights into the sentiment surrounding a stock, with a higher ratio suggesting greater bearish sentiment.

Components of Short Ratio

• Short Interest: This is the total number of shares that have been sold short but not yet covered or closed out. It reflects investors’ expectations that the stock’s price will decline.
• Average Daily Trading Volume: This is the average number of shares traded per day over a specified period, usually calculated over a month. It provides context for how easily short positions can be covered.

Calculation of Short Ratio

The Short Ratio is calculated using the following formula:

Short Ratio = Short Interest / Average Daily Trading Volume

Example of Calculating Short Ratio

For example, consider a company with:

• Short Interest of 1,000,000 shares
• Average Daily Trading Volume of 200,000 shares

Using the formula:
Short Ratio = 1,000,000 / 200,000 = 5

This result indicates that it would take 5 days for all short sellers to cover their positions at the current trading volume, suggesting a relatively high level of bearish sentiment surrounding the stock.

Understanding the Short Ratio can assist investors in evaluating the potential risk and opportunities related to short selling in the market.