Financial Ratio Analysis

Short Term Solvency and Liquidity

Ratios Formulas
1. Current Ratio Total Current Assets
Total Current Liabilities

2. Acid-test ratio or quick ratio Total Quick Assets

Total Current Liabilities

3. Working Capital to Total Assets Working Capital

Total Assets

4. Working Capital Current Assets Less Current Liabilities

5. Cash flow liquidity ratio Cash + Marketable Securities + Cash
Flow from Operating Activities
Current Liabilities
6. Defensive interval ratio Current Liabilities
Cash and Cash Equivalents

Asset Liquidity and Management Efficiency

Ratios Formulas
1. Trade receivable turnover Net credit sales
Average Trade Receivable
2. Average collection period or number of 360 days
days’ sale uncollected Receivable Turnover

Or
Accounts Receivable
Net Sales / 360
3. Inventory Turnovers
a. Merchandise Turnover Cost of Goods Sold
Average Merchandise Inventory

b. Finished goods inventory turnover Cost of Goods Sold

Ave. Finished Goods Inventory

c. Goods in process turnover Cost of Goods Manufactured

Average Goods in Process Inventory

d. Raw materials turnover Raw Materials Used

Ave. Raw Materials Inventory

4. Days supply in inventory 360

Inventory Turnover
5. Working Capital Turnover Net Sales
Ave. Working Capital

6. Current Assets Turnover Cost of Sales + Operating Expenses +

Income Taxes + Other Expenses (excluding
depreciation and amortization
Ave. Current Assets
7. Payable Turnover Net Purchases
Average Accounts Payable
8. Operating Cycle Average Collection Period of Receivable
+
Average Conversion Period of Inventories
+
Days Cash

9. Days cash Ave. Cash Balance

Cash Operating Costs /360 days
10. Investment or Assets turnover Net Sales
Ave. Total Investment or Total Assets
11. Sales to fixed assets (Plant asset Net Sales
turnover ) Ave. Fixed Assets(net)
12. Capital Intensity ratio Total Assets
Net Sales

Long Term Financial Position or Stability

Ratios Formulas
1. Debt Ratio Total Liabilities
Total Assets
2. Equity ratio Total Owners’ Equity
Total Assets
3. Debt to equity ratio Total Liabilities
Total Owners’ Equity
4. Fixed Assets to Total owners’ equity Fixed Assets(net)
Total Owners’ Equity
5. Fixed Assets to Long term liabilities Fixed Assets(net)
Long Term Liabilities
6. Fixed Assets to Total equity Fixed Assets(net)
Total Assets
7. Book value per share of common stock Common Stockholders’ Equity
No. of Outstanding Shares of Common
Stock
8. Times interest earned Net income before Interest and Taxes
Annual Interest Charges
 Profitability and Returns to Investors
Ratios Formulas
1. Gross profit margin Gross Profit
Net Sales

2. Operating profit margin Operating Profit

Net Sales

3. Net profit margin (rate of return on net sales) Net Profit

Net Sales

4. Cash flow margin Cash Flow for Operating Activities

Net Sales
5. Rate of return on assets (ROA) Net Profit
Ave. Total Assets

Or

Asset Turnover x Net Profit Margin

6. Rate of return on owners’ equity Net Income

Ave. Owners’ Equity
7. Earnings per share Net Income Less Preferred Dividends
Ave. Shares of Common Stock
Outstanding
8. Price-Earnings ratio Market Value Per Share of Common Stock
Earnings Per Share of Common Stock
9. Dividend payout Dividend Per Share
Earnings Per Share
10. Dividend yield Dividend Per Share
Market Value Per Share of Common Stock

11. Dividends per share Dividends Paid/Declared

Common Shares Outstanding
12. Rate of return on average current assets Net Income
Ave. Current Assets
13. Rate of return on average current assets Rate of Return on Ave. Current Assets
Current Assets Turnover

Note:
1. If there is an interest-bearing debt, Rate of return is computed as:
Net Income + [Interest expense (1-tax rate)]
Average Total Assets
2. ROE = Return on Assets x Equity Multiplier
Equity Multiplier = 1/Equity Ratio