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Financial Ratios

The document outlines various financial ratios used to assess a company's liquidity, solvency, operational efficiency, profitability, and market value. It includes formulas for calculating key ratios such as current ratio, debt to equity ratio, inventory turnover, and return on equity. Additionally, it describes concepts like operating leverage and the Dupont model for analyzing return on assets and equity.

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Eunice Membrebe
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38 views2 pages

Financial Ratios

The document outlines various financial ratios used to assess a company's liquidity, solvency, operational efficiency, profitability, and market value. It includes formulas for calculating key ratios such as current ratio, debt to equity ratio, inventory turnover, and return on equity. Additionally, it describes concepts like operating leverage and the Dupont model for analyzing return on assets and equity.

Uploaded by

Eunice Membrebe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Ratios

Liquidity Ratios – is the ability of a company to pay its current obligations as they come due, as
well as have cash to meet unexpected needs.

Net Working Capital = Current Assets – Current Liabilities


Net Working Capital Ratio = Net Working Capital/Total Assets
Current Ratio = Current Assets/Current Liabilities
Quick Ratio = (Cash +Marketable Securities + A/R)/Current Liabilities
Quick Ratio = (Current Assets – Inventory – Prepaid Expense)/Current Liabilities
Cash Ratio = (Cash + Marketable Securities)/Current Liabilities
Current Cash Debt Coverage Ratio = Cash Provided by Operations/Current Liabilities

Solvency Ratios – is the ability of a company to survive a long period of time or the ability of the
company to pay not only its current obligations as they come due but also its long-term liabilities.

Debt to Equity Ratio = Total Debt/Equity


Long-term Debt to Equity Ratio = ((Total Debt – Current Liabilities)/Equity
Debt to Total Assets Ratio = Total Debt/Total Assets
Fixed Charge Coverage (Earnings to Fixed Charges Ratio) = Earnings before Fixed Charges and
Taxes/Fixed Charges
Interest Coverage = EBIT/Interest Expense
Cash Flow to Fixed Charges = (Cash from Operations + Fixed Charges +Tax Payments)/Fixed Charges

Operation Leverage – is the extent that a company’s operating income (EBIT)will change based
on a change in sales.

Degree of Operating Leverage (DOL) = % Change in EBIT/% Change in Sales


Degree of Operating Leverage (DOL) = Contribution Margin/EBIT

Financial Leverage – looks at a company’s capital structure, which is the balance between debt
and equity financing.

Degree of Financial Leverage (DFL) = % Change in Net Income/% Change in EBIT


Degree of Financial Leverage (DFL) = EBIT/EBT

Efficiency Ratios

Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory


Days Sales in Inventory = 365 days/Inventory Turnover
Days Sales in Inventory = Average Inventory/ (Cost of Goods Sold/365)

A/R Turnover Ratio = Credit Sales/Average Gross A/R


Days Sales in Receivables = 365 days/A/R Turnover
Days Sales in Receivables = Average Gross A/R/(Credit Sales/365)
A/P Turnover Ratio = Credit Purchases/Average A/P
Days Purchases in A/P = 365 days/A/P Turnover
Days Purchases in A/P = Average A/P/(Credit Purchases/365)

Operating Cycle = Days Sales in A/R + Days Sales in Inventory+Days Purchases in A/P
Cash Cycle = Operating Cycle – Days Purchases in A/P

Profitability Ratios – this is based on the entity’s use of its assets to generate sales.

Asset Turnover = Net Sales/Average Total Assets


Fixed Asset Turnover = Net Sales/Average PPE

Gross Margin Ratio = Gross Profit/Net Sales


Operating Profit Margin Ratio = Operating Income/Net Sales
Profit Margin Ratio = Net Income/Net Sales
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) = EBITDA/Net Sales

Return on Assets = Net Income/Average Total Assets


Return on Equity = Net Income/Average Equity

Sustainable Growth Rate (SGR) = ROE x ( 1 – Dividend Payout Ratio)

Market Value Ratios

Market to Book Ratio = Current Stock Price/Book Value per Share


Book Value = (Total Stockholders’ Equity – Preferred Equity)/No. of Common Shares Outstanding
Price/Earnings Ratio = Market Price per Share/Earnings per Share

Earnings per Share = (Net Income – Preferred Dividends)/Weighted Ave Common Shares Outstanding
Diluted EPS = (Net Income – Preferred Dividends)/ Diluted Weighted Ave Common Shares
Outstanding

Earnings Yield = EPS/Market Price per Share


Dividend Yield = Annual Dividend per Share/Market Price per Share
Dividend Payout Ratio = Common Dividends/Earnings Available to Common Shareholders
Shareholder Return = (Ending Stock Price – Beginning Stock Price + Annual Dividend per Share)/
Beginning Stock Price

Dupont Model on ROA = (Net Income/Sales) x (Sales/Average Total Assets


= Net Profit Margin x Total Assets Turnover

Dupont Model in ROE = (Net Income/Average Total Assets) x (Average Total Assets/Average Equity)

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