Financial Ratio Analysis -- Liquidity

How
Formula Expressed Meaning

1. Liquidity Ratios
Current assets
Current ratio Current liabilities Decimal A short-term indicator of the
company’s ability to pay its short-term
liabilities from short-term assets; how
much of current assets are available to
cover each dollar of current liabilities.
Current assets – Inventory
Quick (acid test) ratio Decimal Measures the company’s ability to pay
Current liabilities off its short-term obligations from
current assets, excluding inventories.
Inventory to net Inventory Decimal A measure of inventory balance;
working capital Current assets – Current liabilities measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.
Cash + Cash equivalents
Cash ratio Decimal Measures the extent to which the
Current liabilities company’s capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.
 Financial Ratio Analysis -- Profitability

How
Formula Expressed Meaning

2. Profitability Ratios
Net profit after taxes
Net profit margin Net sales Percentage Shows how much after-tax profits are
generated by each dollar of sales.
Sales – Cost of goods sold
Gross profit margin Percentage Indicates the total margin available to
Net sales cover other expenses beyond cost of
goods sold, and still yield a profit.
Net profit after taxes
Return on investment Total assets Percentage Measures the rate of return on the total
(ROI) assets utilized in the company; a
measure of management’s efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.
Net profit after taxes
Return on equity Percentage Measures the rate of return on the
Shareholders’ equity
(ROE) book value of shareholders’ total
investment in the company.
Net profit after taxes –
Earnings per share preferred stock dividends Dollars per Shows the after-tax earnings
(EPS) Average number of share generated for each share of common
common shares stock.
 Financial Ratio Analysis -- Activity

How
Formula Expressed Meaning

3. Activity Ratios Net sales

———————
Inventory turnover Inventory Decimal Measures the number of times that average inventory of
finished goods was turned over or sold during a period of
Inventory time, usually a year.
———————————
Days of inventory Cost of goods sold ÷ 365 Days Measures the number of one day’s worth of inventory that
a company has on hand at any given time.
Net sales
Net working capital ————————— Decimal Measures how effectively the net working capital is used
turnover Net working capital to generate sales.
Asset turnover Sales Decimal Measures the utilization of all the company’s assets;
—————————
Total assets measures how many sales are generated by each dollar
of assets.
Fixed asset turnover Sales Decimal Measures the utilization of the company’s fixed assets
———————
Fixed assets (i.e., plant and equipment); measures how many sales
are generated by each dollar of fixed assets.
Average collection Accounts receivable Days Indicates the average length of time in days that a
—————————
period Sales for year ÷ 365 company must wait to collect a sale after making it; may
be compared to the credit terms offered by the company
to its customers.
Annual credit sales
Accounts receivable ————————— Decimal Indicates the number of times that accounts receivable
turnover Accounts receivable
are cycled during the period (usually a year).
Accounts payable Accounts payable Days Indicates the average length of time in days that the
————————————
period Purchases for year ÷ 365 company takes to pay its credit purchases.
Days of cash Cash Days Indicates the number of days of cash on hand, at present
——————————— sales levels.
Net sales for year ÷ 365
 Financial Ratio Analysis -- Leverage

How
Formula Expressed Meaning

4. Leverage Ratios
Total debt
Debt to asset ratio Percentage Measures the extent to which borrowed
Total assets funds have been used to finance the
company’s assets.

Debt to equity ratio Total debt Percentage Measures the funds provided by creditors
Shareholders’ equity versus the funds provided by owners.

Long-term debt to Long-term debt Percentage Measures the long-term component of

capital structure Shareholders’ equity capital structure.

Times interest Profit before taxes + Interest charges Decimal Indicates the ability of the company to
earned Interest charges meet its annual interest costs.

Coverage of fixed Profit before taxes + Decimal A measure of the company’s ability to
charges Interest charges + Lease charges meet all of its fixed-charge obligations.
Interest charges + Lease obligations

Current liabilities to Current liabilities Percentage Measures the short-term financing

equity Shareholders’ equity portion versus that provided by owners.
 Financial Ratio Analysis -- Other

Financial Ratio Analysis — Other

How
Formula Expressed Meaning

5. Other Ratios
Market price per share
Price/earning ratio Earnings per share Decimal Shows the current market’s evaluation
of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.

Dividend payout ratio Annual dividends per share Percentage Indicates the percentage of profit that
Annual earnings per share is paid out as dividends.

Dividend yield on Annual dividends per share Percentage Indicates the dividend rate of return to
common stock Current market price per share common shareholders at the current
market price.