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Liquidity Ratios Calculation Formulas and Explanations

1) Acid Test Ratio

Acid Test Ratio = (cash + marketable

securities) / current liabilities

The acid test ratio measures the immediate amount of cash immediately available to
satisfy short term debt.
2) Accounts Payable Turnover Ratio

Accounts Payable Turnover Ratio = total supplier purchases / average

accounts payable

The accounts payable turnover ratio shows the number of times that accounts
payable are paid throughout the year.

A falling accounts payable turnover ratio indicates that the company is taking
longer to pay its suppliers.

3) Cash Ratio

Cash Ratio = cash / current liabilities

Cash ratio (cash and marketable securities to current liabilities ratio) measures
the immediate amount of cash available to satisfy short term debt.
4) Current Ratio

Current ratio = current assets / current liabilities.

 The current ratio is used to evaluate the liquidity, or ability to meet short term debts.

High current ratios are needed for companies that have difficulty borrowing on short
term notice.

The generally acceptable current ratio is 2:1; the minimum acceptable current ratio
is 1:1

5) Debt Service Coverage Ratio

Debt Service Coverage Ratio = net operating income / (interest + current

portion of LongTermDebt)

The debt service coverage ratio is also known as the debt coverage ratio, debt
service capacity ratio or DSCR.

The debt service coverage ratio shows the ability to meet annual interest and debt
repayment obligations.

A debt service coverage ratio of less than 1:1 means that it does not have sufficient
income to meet its debt demands.
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6) Long Term Debt to Shareholders Equity (Gearing) Ratio

Gearing Ratio = long term debt / shareholders equity.

 The long term debt to shareholders equity ratio is also referred to as the
gearing ratio.
 
A high gearing ratio is unfavorable because it indicates possible difficulty in meeting
long term debt obligations.
7) Debt Income Coverage Ratio

Debt Income Ratio = total debt / net income

Long Term Debt Ratio = long term debt / net income

The debt income ratio shows debt as a portion of net income.

The debt income ratio shows the amount of total debt in proportion to net income.

The debt income ratio is the inverse of the years debt ratio, which shows the
number of years it will take to pay off all debt and replace assets when due (assuming
no dividends are paid). The long term debt ratio shows the number of years to retire
long term debt from net income.

8) Quick Assets

Quick Assets = cash + marketable securities + accounts receivable.

 Quick assets are the amount of assets that can be quickly converted to cash.
 

9) Working Capital

 Working Capital = current assets - current liabilities.

 Working Capital Ratio = current assets / current liabilities
 
The working capital ratio is also referred to as the current ratio.

Working capital is the liquid reserve available to satisfy contingencies and

uncertainties.
 
A high working capital balance is needed if the business is unable to borrow on short
notice.
 
Banks look at working capital over time to determine a company's ability to weather
financial crises.
 
Loans often specify minimum working capital requirements.

10) Working Capital from Operations to Total Liabilities

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Working Capital from Operations to Total Liabilities = working capital

provided from operations / current liabilities
 
This ratio measures the degree by which internally generated working capital is
available to satisfy obligations.
 

11) Working Capital Provided by Net Income

Working Capital Provided by Net Income = net income - depreciation
 
A high ratio indicates that a company's liquidity position is improved because net
profits result in liquid funds. 

Leverage Ratios Calculation Formulas and Explanations

1) Capital Acquisition Ratio

Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid
for acquisitions.
 The capital acquisition ratio reflects the company's ability finance capital
expenditures from internal sources. 
 A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more
cash from the business than it is generating.

2) Capital Employment Ratio 

Capital Employment Ratio = sales / (owners equity - non-operating assets).
 The capital employment ratio is also referred to as the capital employed ratio.
 The capital employment ratio shows the amount of sales which owner's investment
in operations generates.

3) Debt Ratio
   Debt Ratio = liabilities / assets
 The debt ratio is also know as the debt to capital ratio, debt to equity ratio or
financial leverage ratio.
 The debt ratio shows the reliance on debt financing.
 A high debt ratio is unfavorable because it indicates that the company is already
overburdened with debt.
4) Financial Leverage Ratio
Financial Leverage Ratio = total debt / shareholders equity.

 The financial leverage ratio is also referred to as the debt to equity ratio.The
financial leverage ratio indicates the extent to which the business relies on debt
financing.

Upper acceptable limit of the financial leverage ratio is usually 2:1, with no more
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than one-third of debt in long term.

A high financial leverage ratio indicates possible difficulty in paying interest and
principal while obtaining more funding.

 
5) Fixed Assets to Short Term Debt Ratio 
Fixed Assets to Short Term Debt = fixed assets / (accounts payable + current
portion of long term debt).
 The fixed assets to short term debt ratio can indicate dangerous financial policies
due to business vulnerability in a tight money market.
 A low fixed assets to short term debt ratio indicates the return on fixed assets
may not be realized before long term liabilities mature.

6) Fixed Coverage Ratio 

Fixed coverage = earnings before interest and taxes / fixed charges before
taxes.
    The fixed coverage ratio indicates the ability of a business to pay fixed charges
(fixed costs) when business activity falls.
 

7) Debt to Equity Ratio (Financial Leverage Ratio)

  Debt to Equity Ratio = Short Term Debt +Long Term Debt

                                            Total Shareholders’ Equity

 Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or
Leverage Ratio.

The debt to equity (debt or financial leverage) ratio indicates the extent to which the
business relies on debt financing.

Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is
usually 2:1, with no more than one-third of debt in long term.

A high financial leverage or debt to equity ratio indicates possible difficulty in paying
interest and principal while obtaining more funding.

 
8) Interest Coverage Ratio

Interest Coverage Ratio = (net income + interest) / interest.

 
   The interest coverage ratio is also referred to as the times interest earned ratio.
 
The interest coverage ratio indicates the extent of which earnings are available to
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meet interest payments.

 A lower interest coverage ratio means less earnings are available to meet interest
payments and that the business is more vulnerable to increases in interest rates. 
  

9) Operating Leverage Ratio 

Operating Leverage = percent change in EBIT / percent change in sales.
  The operating leverage reflects the extent to which a change in sales affects
earnings.
 A high operating leverage ratio, with a highly elastic product demand, will cause
sharp earnings fluctuations.

10) Retained Earnings to Total Assets Ratio

Retained Earnings to Total Assets  = retained earnings / total assets

This ratio indicates the extent to which assets have been paid for by company profits.

Retained earnings to total assets ratio near 1:1 (100%) indicates that growth has
been financed through profits, not increased debt.

A low ratio indicates that growth may not be sustainable as it is financed from
increasing debt, instead of reinvesting profits. 
11) Short Term Debt to Depreciation Ratio
Short Term Debt to Depreciation = current portion of long term debt /
depreciation
 
A short term debt to depreciation ratio of close to 1:1 (100%) indicates that the
repayment of long term debt is inj line with the life of the assets.
 
This ratio should be in line with inflation in fixed asset prices.
 

12) Short Term Debt to Liabilities Ratio

Short Term Debt to Liabilities = (accounts payable + current portion of
long term debt) / (accounts payable + long term debt) 
 
This ratio indicates liquidity.
 
A higher ratio means less liquidity.

13) Short to Long Term Debt Ratio 

Short Term Debt to Long Term Debt = current portion of long term debt /
long term debt
 
    
The short to long term debt ratio can indicate if a business is vulnerable to a
money market squeeze.
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14) Non-Current Assets to Non-Current Liabilities Ratio

Non-Current Assets to Non-Current Liabilities = non-current assets / non-current

liabilities

This ratio indicates protection (collateral) for long term creditors.

A lower ratio means that there is a lower amount of assets backing long term debt.

15) Capital Structure Ratio

Capital Structure Ratio = long term debt / (shareholders equity + long term
debt).
 
  The capital structure ratio shows the percent of long term financing represented by
long term debt.
 
A capital structure ratio over 50% indicates that a company may be near their
borrowing limit (often 65%).

16) Capital to Non-Current Assets  Ratio

 Capital to Non-Current Assets Ratio = owners equity / non-current assets

 
A higher capital to non-current assets ratio indicates that it is easier to meet the
business' debt and creditor commitments.
 

17) Cash Balance Ratio

 
Cash Balance = (cash x 365 days) / (cost of sales [excluding depreciation])
 The Cash Balance Ratio is also referred to as Days Cash Balance.

The cash balance ratio indicates the number of days that a company can pay its
debts, as they become due, out of current cash.

18) Fixed Costs to Total Assets Ratio

   Fixed costs to total assets = fixed costs / total assets
 An increase in the fixed costs to total assets ratio may indicate higher fixed
charges, possibly resulting in greater instability in operations and earnings.
 

Cash Flow Ratios Calculation Formulas and Explanations

1) Cash Flow from Operations to Net Income Ratio

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Cash Flow from Operations to Net Income = (cash flow from operations) /
net income

The cash flow from operations to net incomes ratio indicates the extent to which
net income generates cash in a business.

A decline in the cash flow from operations to net income ratio indicates a cash flow
problem.

 The cash flow from operations to net income ratio is included in the financial
statement ratio analysis spreadsheets highlighted in the left column, which
provide formulas, definitions, calculation, charts and explanations of each ratio. 

2) Cash Flow Coverage Ratio

 Cash Flow Coverage Ratio = net income + depreciation and amortization/total
debt payments.
     The cash flow coverage ratio indicates the ability to make interest and principal
payments as they become due.

A cash flow coverage ratio of less than one indicates bankruptcy within two years.

3) Cash Flow to Long Term Debt Ratio

Cash Flow to Long Term Debt = cash flow / long term debt

The cash flow to long term debt ratio appraises the adequacy of available funds to
pay obligations.

4) Cash Flow from Sales to Sales Ratio

Cash Flow from Sales to Total Sales = (cash flow from operations -
dividends) / total sales
 
The cash flow from sales to sales ratio indicates the degree to which sales generate
cash retained by the business.
 A positive cash flow from sales to sales ratio means that sales are generating cash
flow.

5) Cash Flow from Operations to Current Portion of Long Term Debt  

Cash Flow from Operations to Current Portion of LTD = cash flow from
operations / current portion of long term debt
 
This ratio indicates the ability to retire debt as currently structured.
A ratio of less than 1:1 (100%) indicates that debt is structured to be repaid quicker
than the company has the ability to.

6) Operations Cash Flow to Current Liabilities Ratio

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Operations Cash Flow to Current Liabilities = cash flow from operations /

current liabilities
 If the operations cash flow to current liabilities ratio keeps increasing, it may
indicate that cash inflows are increasing and need to be invested.  

 The operations cash flow to current liabilities ratio is included in the financial
statement ratio analysis spreadsheets highlighted in the left column, which
provide formulas, definitions, calculation, charts and explanations of each ratio. 

7) Operations Cash Flow Plus Interest to Interest Ratio

Operations Cash Flow Plus Interest to Interest = (cash flow from operations
+ interest) / interest

This ratio indicates the cash actually available to meet interest charges.

A ratio of less than 1:1 (100%) indicates insufficient cash flow is being generated to
meet current interest payments.

 Profitability Ratios Calculation Formulas and Explanations

1) Cash Debt Coverage Ratio

   Cash Debt Coverage = (cash flow from operations - dividends) / total debt.

The cash debt coverage ratio shows the percent of debt that current cash flow can
retire.

A cash debt coverage ratio of 1:1 (100%) or greater shows that the company can
repay all debt within one year.

2) Cash Return on Assets Ratios 

Cash Return on Assets (excluding interest) = (cash flows from operations
before interest and taxes) / total assets.
 
Cash Return on Assets (including interest) = (cash flow from operations) /
total assets.
 A higher cash return on assets ratio indicates a greater cash return.

The cash return on assets (excluding interest) contains no provision for replacing
assets or future commitments.

The cash return on assets (including interest) indicates internal generation of

cash available to creditors and investors.

3) Contribution Margin and Contribution Margin Ratio

Contribution Margin = sales - variable costs.
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Contribution Margin Ratio = (sales - variable costs)/sales.

Contribution margin is the amount generated by sales to cover fixed costs.

The contribution margin ratio indicates the percent of sales available to cover fixed costs and
profits.
4) Gross Profit Margin Ratio (Gross Margin Ratio)

  Gross Profit Margin Ratio = gross profit / sales.

 Gross profit margin ratio is also called gross margin ratio.
 
To calculate gross profit subtract cost of sales (variable costs) from sales. (i.e. gross profit =
sales - cost of sales)

A low gross profit margin ratio (or gross margin ratio) indicates that low amount of earnings,
required to pay fixed costs and profits, are generated from revenues.

A low gross profit margin ratio (or gross margin ratio) indicates that the business is unable
to control its production costs.

The gross profit margin ratio (or gross margin ratio) provides clues to the company's pricing,
cost structure and production efficiency.

The gross profit margin ratio (or gross margin ratio) is a good ratio to benchmark against
competitors.
5) Operating Margin Ratio

Operating Margin = net profits from operations / sales.

    The operating margin is also referred to as operating profit margin, or EBIT to
sales ratio.
 The operating margin ratio determines whether the fixed costs are too high for the
production volume.
 

6) Profit Margin Ratios 

Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales.
 
Pretax Margin Ratio = net profit before taxes / sales.
 
Operating Profit Margin (Operating Margin) = net income before interest and taxes /
sales.
 These three profit margin ratios state how much profit the company makes for every dollar
of sales. 
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The net profit margin ratio is the most commonly used profit margin ratio.

A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs
and profits, are generated from revenues.

A low profit margin ratio indicates that the business is unable to control its production costs.

The profit margin ratio provides clues to the company's pricing, cost structure and
production efficiency.

The profit margin ratio is a good ratio to benchmark against competitors.

7) Return on Assets Ratio

 
Return on Assets = net profit before taxes / total assets.
 
The return on assets ratio provides a standard for evaluating how efficiently financial
management employs the average dollar invested in the firm's assets, whether the dollar came
from investors or creditors.
 
A low return on assets ratio indicates that the earnings are low for the amount of assets.
 
The return on assets ratio measures how efficiently profits are being generated from the
assets employed.
 
A low return on assets ratio compared to industry averages indicates inefficient use of
business assets.

8) Return on Common Equity Ratio

Return on Common equity = (net profit - preferred share dividends) / (shareholders

equity- preferred shares).
 
The return on common equity ratio shows the return to common stockholders after
factoring out preferred shares.
 
A return of over 10% indicates enough to pay common share dividends and retain funds for
business growth.

9) Return on Investment Ratio Formula, Calculation and Definition 

Return on Investment Ratio = net profits before tax / shareholders equity.
 
   The return on investment ratio provides a standard return on investor's equity.
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The return on investment ratio is also referred to as return on investment or ROI

Return on Investment is a key ratios for investors.

Return on Sales Ratio

   Return on Sales =  Net Profit / Sales
10) Times Interest Earned Ratio

Times Interest Earned Ratio = (net income + interest) / interest.

 
The times interest earned ratio indicates the extent of which earnings are available to meet
interest payments.
 
A lower times interest earned ratio means less earnings are available to meet interest
payments and that the business is more vulnerable to increases in interest rates. 

Turnover Ratios Formulas and Explanations

1) Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio = annual credit sales / average
accounts receivable
 This is the ratio of the number of times that accounts receivable amount is collected
throughout the year.
 A high accounts receivable turnover ratio indicates a tight credit policy.
 A low or declining accounts receivable turnover ratio indicates a collection problem,
part of which may be due to bad debts.

2) Asset Turnover Ratio

 
Asset Turnover Ratio = sales / fixed assets.
 
A low asset turnover ratio means inefficient
utilization or obsolescence of fixed assets, which
may be caused by excess capacity or interruptions in
the supply of raw materials.

3) Cash Turnover Ratio

Cash Turnover = (cost of sales {excluding depreciation}) / cash.

 
Cash Turnover Ratio = (365 days)/ cash balance ratio.
 The cash turnover ratio indicates the number of times that cash turns over in a year.
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4) Inventory Turnover Ratio/ Inventory Conversion Ratio

Inventory Turnover Ratio = cost of goods sold / average inventory.

 The inventory turnover ratio measures the number of times a company sells its inventory
during the year.
 A high inventory turnover ratio indicated that the product is selling well.
 The inventory turnover ratio should be done by inventory categories or by individual
product.

Percent Change in Operating Income versus Sales Volume Ratio

Percent change in operating income vs. sales volume = % change in operating
income / % change in sales volume
 
An increase may indicate higher fixed charges.

   Sales Ratios Calculation Formulas and Explanations

1)
Sales to Accounts Payable Ratio

   Sales to Accounts Payable = Sales / accounts payable

A high sales to accounts payable ratio indicates the inability to obtain short-term
credit on the form of cost-free funds to finance sales growth.
2) Sales to Break-even Point Ratio

Sales to Break-even (or Breakeven) Point = sales / break-even point

 
This ratio reflects the extent to which profits are not vulnerable to a decline in sales.
 
A sales to breakeven point ratio near 1:0 (100%) means that the company is quite
vulnerable to economic declines.
 
A ratio below 1:1 (100%) indicates that the company's sales are inadequate to cover
fixed costs.
 

3) Sales to Cash Ratio

   Sales to Cash = sales / cash

 
This is sometimes referred to as a cash turnover ratio.

A high sales to cash ratio may indicate a cash shortage.

A low ratio many reflect the holding of idle and unnecessary cash balances.
4) Sales to Current Assets Ratio
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   Sales to Current Assets = sales / current assets

 
A high sale to current assets ratio indicates deficient working capital. 

5) Sales to Fixed Assets Ratio

 Sales to Fixed Assets = sales / fixed assets.

   
The sales to fixed assets ratio is often called the asset turnover ratio.
 
A low sales to fixed assets ratio means inefficient utilization or obsolescence of
fixed assets, which may be caused by excess capacity or interruptions in the supply
of raw materials.

6) Ratio of Sales to Net Income

   Sales  to Net Income = sales / net income

 
A declining ratio is a cause for concern.
 

7) Sales to Total Assets Ratio

   Sales to Total Assets = sales / total assets

 A low ratio indicates that the total assets of the business are not providing adequate
revenue.
 

8) Sales to Working Capital Ratio

   Sales to Working Capital = sales / working capital

 
A high ratio may indicate inadequate working capital, which reflects negatively on
liquidity

Trend in Sales

 Trend in Sales is the rate at which sales are increasing or decreasing

 
The trend in sales is also referred to as the sales trend.
 
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