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Financial Ratios

LEADERSHIP TOOLBOX COMMONLY USED FINANCIAL RATIOS These are the 15 most commonly used financial ratios and concepts. These are the formulas for calculating them, how they are used, and examples of good performance.

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109 views2 pages

Financial Ratios

LEADERSHIP TOOLBOX COMMONLY USED FINANCIAL RATIOS These are the 15 most commonly used financial ratios and concepts. These are the formulas for calculating them, how they are used, and examples of good performance.

Uploaded by

Stone Eyes
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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WWW.LEADINGRESOURCES.

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LEADERSHIP TOOLBOX

COMMONLY USED FINANCIAL RATIOS


These are the 15 most commonly used financial ratios and concepts, along with the formulas for calculating them, how they are used, and examples of good performance. This tool is particularly useful for leaders who do not have a financial background but need to understand financial yardsticks. Ratio Formula current assets/ current liabilities Comments Measures cash reserves; 2 is solid; varies by industry.

Current

Quick

current assets minus inventory/ current liabilities

Indicates what a company can realize in cash right away; 1 is solid.

EBITA

earnings minus interest, taxes and amortization.

Indicates underlying financial performance by stripping away non-revenue based factors.

Debt to assets

long-term debt/total assets

Measures relative security of current debt; .33 is good. Provides insight into companys financial strategy. Shows how many assets each dollar of equity supports.

Debt to equity

total debt/total equity

Leverage

total assets/ stockholders equity

Inventory turnover

total sales/ total value of inventory

Measures how much money is tied up in inventory.

Average collection period

accounts receivable/ sales per day

Use to assess collection policies and procedures; if terms are net 30, then 30 to 40 is good.

Sales to fixed assets

sales/assets

Shows sales efficiency; must be compared to industry average.

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LEADERSHIP TOOLBOX

Profit margin on sales

net income/total sales

Shows profit efficiency; must be compared to industry average.

Return on Equity

net income/ stockholders equity

Shows yield to investors; 15 percent considered good.

Return on total assets

a) net income/total assets b) net income + after tax interest/total assets

Shows yield on assets; second formula (b) perhaps more accurate because total assets include debt.

Return on investment

net income/ shareholders equity

Same as return on equity.

Price to cash flow Price/earnings ratio (also known as P/E)

stock price per share/ cash flow per share

Evaluates stock performance; sum of net income and depreciation can be used to compute cash flow. Evaluates stock performance; must be compared with industry, stock market, and company history.

price per share/ earnings per share

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