Financial Ratios

Every company needs to measure its performance objectively. Please find a list below of some of the common financial ratios and metrics we use with our clients. We compare our clients numbers to their respective industry averages as well as overall business criteria. LIQUIDITY RATIOS WORKING CAPITAL Total Current Assets - Total Current Liabilities Explanation: This metric is a measure of both a companys efficiency and its short-term financial health. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets. CURRENT RATIO Total Current Assets / Total Current Liabilities Explanation: Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible.

QUICK RATIO (Cash + Accounts Receivable) / Total Current Liabilities Explanation: This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities).

INVENTORY DAYS (Inventory / COGS) * 365 Explanation: This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric.

ACCOUNTS RECEIVABLE DAYS (Accounts Receivable / Sales) * 365 Explanation: This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric.

ACCOUNTS PAYABLE DAYS (Accounts Payable / COGS) * 365

Explanation: This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations.

PROFITS AND PROFIT MARGINS GROSS PROFIT MARGIN (Sales - COGS) / Sales Explanation: The financialmetric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

NET PROFIT MARGIN Adjusted Net Profit before Taxes / Sales Explanation: This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts.

ADVERTISING TO SALES Advertising Expense / Sales Explanation: This metric shows advertising expense for the company as a percentage of sales.

RENT TO SALES RentExpense / Sales Explanation: This metric shows rent expense for the company as a percentage of sales.

PAYROLL TO SALES PayrollExpense / Sales Explanation: This metric shows payroll expense for the company as a percentage of sales.

BORROWING RATIOS EBITDA Revenue Expenses (excluding interest, tax depreciation, and amortization) Explanation: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

INTEREST COVERAGE RATIO EBITDA / Interest Expense

Explanation: This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality.

DEBT-TO-EQUITY RATIO Total Liabilities / Total Equity Explanation: This Balance Sheet leverage ratio indicates the composition of a companys total capitalization -- the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage.

DEBT LEVERAGE RATIO Total Liabilities / EBITDA Explanation: This ratio measures a company's ability to repay debt obligations from annualized operating cash flow (EBITDA).

ASSETS RATIOS RETURN ON EQUITY Net Income / Total Equity Explanation: This measure shows how much profit is being returned on the shareholders' equity each year. It is a vital statistic from the perspective of equity holders in a company.

RETURN ON ASSETS Net Income / Total Assets Explanation: This calculation measures the company's ability to use its assets to create profits. Basically, ROA indicates how many cents of profit each dollar of asset is producing per year. It is quite important since managers can only be evaluated by looking at how they use the assets available to them.

FIXED ASSET TURNOVER Sales / Gross Fixed Assets Explanation: This asset management ratio shows the multiple of annualized sales that each dollar of gross fixed assets is producing. This indicator measures how well fixed assets are "throwing off" sales and is very important to businesses that require significant investments in such assets. Readers should not emphasize this metric when looking at companies that do not possess or require significant gross fixed assets.

Ratios and Formulas in Customer Financial Analysis

Financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. The judgment process can be improved by experience and the use of analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the analysis of relationships between two or more line items on the financial statement. Financial ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for the purpose of evaluating aspects of a company's operations and fall into the following categories:

liquidity ratios measure a firm's ability to meet its current obligations. profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business. leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time. efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business.

A ratio can be computed from any pair of numbers. Given the large quantity of variables included in financial statements, a very long list of meaningful ratios can be derived. A standard list of ratios or standard computation of them does not exist. The following ratio presentation includes ratios that are most often used when evaluating the credit worthiness of a customer. Ratio analysis becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand. Liquidity Ratios Working Capital Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due.
Formula

Current Assets - Current Liabilities Acid Test or Quick Ratio A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity. Formula Cash + Marketable Securities + Accounts Receivable Current Liabilities Current Ratio Provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. A business's current assets generally consist of cash, marketable securities, accounts receivable, and inventories. Current liabilities include accounts payable, current maturities of long-term debt, accrued income taxes, and other accrued expenses that are due within one year. In general, businesses prefer to have at least one dollar of current assets for every dollar of current liabilities. However, the normal current ratio fluctuates from industry to industry. A current ratio significantly higher than the industry average could indicate the existence of redundant assets. Conversely, a current ratio significantly lower than the industry average could indicate a lack of liquidity. Formula Current Assets Current Liabilities Cash Ratio Indicates a conservative view of liquidity such as when a company has pledged its receivables and its inventory, or the analyst suspects severe liquidity problems with inventory and receivables. Formula Cash Equivalents + Marketable Securities Current Liabilities

Profitability Ratios
Net Profit Margin (Return on Sales) A measure of net income dollars generated by each dollar of sales. Formula Net Income * Net Sales

* Refinements to the net income figure can make it more accurate than this ratio computation. They could include removal of equity earnings from investments, "other income" and "other expense" items as well as minority share of earnings and nonrecuring items. Return on Assets Measures the company's ability to utilize its assets to create profits. Formula Net Income * (Beginning + Ending Total Assets) / 2 Operating Income Margin A measure of the operating income generated by each dollar of sales. Formula Operating Income Net Sales Return on Investment Measures the income earned on the invested capital. Formula Net Income * Long-term Liabilities + Equity Return on Equity Measures the income earned on the shareholder's investment in the business. Formula Net Income * Equity Du Pont Return on Assets A combination of financial ratios in a series to evaluate investment return. The benefit of the method is that it provides an understanding of how the company generates its return. Formula Net Income * Sales Assets x x Sales Assets Equity Gross Profit Margin Indicates the relationship between net sales revenue and the cost of goods sold. This ratio should be compared with industry data as it may indicate insufficient volume and excessive purchasing or labor costs. Formula

Gross Profit Net Sales

Financial Leverage Ratio

Total Debts to Assets Provides information about the company's ability to absorb asset reductions arising from losses without jeopardizing the interest of creditors. Formula Total Liabilities Total Assets Capitalization Ratio Indicates long-term debt usage. Formula Long-Term Debt Long-Term Debt + Owners' Equity Debt to Equity Indicates how well creditors are protected in case of the company's insolvency. Formula Total Debt Total Equity Interest Coverage Ratio (Times Interest Earned) Indicates a company's capacity to meet interest payments. Uses EBIT (Earnings Before Interest and Taxes) Formula EBIT Interest Expense Long-term Debt to Net Working Capital Provides insight into the ability to pay long term debt from current assets after paying current liabilities. Formula Long-term Debt Current Assets - Current Liabilities

Efficiency Ratios

Cash Turnover Measures how effective a company is utilizing its cash. Formula Net Sales Cash Sales to Working Capital (Net Working Capital Turnover) Indicates the turnover in working capital per year. A low ratio indicates inefficiency, while a high level implies that the company's working capital is working too hard. Formula Net Sales Average Working Capital Total Asset Turnover Measures the activity of the assets and the ability of the business to generate sales through the use of the assets. Formula Net Sales Average Total Assets Fixed Asset Turnover Measures the capacity utilization and the quality of fixed assets. Formula Net Sales Net Fixed Assets Days' Sales in Receivables Indicates the average time in days, that receivables are outstanding (DSO). It helps determine if a change in receivables is due to a change in sales, or to another factor such as a change in selling terms. An analyst might compare the days' sales in receivables with the company's credit terms as an indication of how efficiently the company manages its receivables. Formula Gross Receivables Annual Net Sales / 365 Accounts Receivable Turnover Indicates the liquidity of the company's receivables. Formula Net Sales Average Gross Receivables

Accounts Receivable Turnover in Days Indicates the liquidity of the company's receivables in days. Formula Average Gross Receivables Annual Net Sales / 365 Days' Sales in Inventory Indicates the length of time that it will take to use up the inventory through sales. Formula Ending Inventory Cost of Goods Sold / 365 Inventory Turnover Indicates the liquidity of the inventory. Formula Cost of Goods Sold Average Inventory Inventory Turnover in Days Indicates the liquidity of the inventory in days. Formula Average Inventory Cost of Goods Sold / 365 Operating Cycle Indicates the time between the acquisition of inventory and the realization of cash from sales of inventory. For most companies the operating cycle is less than one year, but in some industries it is longer. Formula Accounts Receivable Turnover in Days + Inventory Turnover in Day Days' Payables Outstanding Indicates how the firm handles obligations of its suppliers. Formula Ending Accounts Payable Purchases / 365 Payables Turnover Indicates the liquidity of the firm's payables.

 Formula Purchases Average Accounts Payable Payables Turnover in Days Indicates the liquidity of the firm's payables in days. Formula Average Accounts Payable Purchases / 365

Additional Ratios
Altman Z-Score The Z-score model is a quantitative model developed in 1968 by Edward Altman to predict bankruptcy (financial distress) of a business, using a blend of the traditional financial ratios and a statistical method known as multiple discriminant analysis. The Z-score is known to be about 90% accurate in forecasting business failure one year into the future and about 80% accurate in forecasting it two years into the future. Formula Z = 1.2 x (Working Capital / Total Assets) +1.4 x (Retained Earnings / Total Assets) +0.6 x (Market Value of Equity / Book Value of Debt) +0.999 x (Sales / Total Assets) +3.3 x (EBIT / Total Assets) Probability of Failure less than 1.8 Very High greater than 1.81 but less than 2.99 Not Sure greater than 3.0 Unlikely Bad-Debt to Accounts Receivable Ratio Bad-debt to Accounts Receivable ratio measures expected uncollectibility on credit sales. An increase in bad debts is a negative sign, since it indicates greater realization risk in accounts receivable and possible future write-offs. Formula Bad Debts Accounts Receivable Bad-Debt to Sales Ratio Bad-debt ratios measure expected uncollectibility on credit sales. An increase in bad debts is a Z-score

negative sign, since it indicates greater realization risk in accounts receivable and possible future write-offs. Formula Bad Debts Sales Book Value per Common Share Book value per common share is the net assets available to common stockholders divided by the shares outstanding, where net assets represent stockholders' equity less preferred stock. Book value per share tells what each share is worth per the books based on historical cost. Formula (Total Stockholders' Equity - Liquidation Value of Preferred Stocks - Preferred Dividends in Arrears) Common Shares Outstanding Common Size Analysis In vertical analysis of financial statements, an item is used as a base value and all other accounts in the financial statement are compared to this base value. On the balance sheet, total assets equal 100% and each asset is stated as a percentage of total assets. Similarly, total liabilities and stockholder's equity are assigned 100%, with a given liability or equity account stated as a percentage of total liabilities and stockholder's equity. On the income statement, 100% is assigned to net sales, with all revenue and expense accounts then related to it. Cost of Credit The cost of credit is the cost of not taking credit terms extended for a business transaction. Credit terms usually express the amount of the cash discount, the date of its expiration, and the due date. A typical credit term is 2 / 10, net / 30. If payment is made within 10 days, a 2 percent cash discount is allowed: otherwise, the entire amount is due in 30 days. The cost of not taking the cash discount can be substantial. Formula % Discount 360 x 100 - % Discount Credit Period - Discount Period Example On a $1,000 invoice with terms of 2 /10 net 30, the customer can either pay at the end of the 10 day discount period or wait for the full 30 days and pay the full amount. By waiting the full 30 days, the customer effectively borrows the discounted amount for 20 days. $1,000 x (1 - .02) = $980 This gives the amount paid in interest as:

$1,000 - 980 = $20 This information can be used to compute the credit cost of borrowing this money. % Discount 360 x 100 - % Discount Credit Period - Discount Period = 2 360 x = .3673 98 20 As this example illustrates, the annual percentage cost of offering a 2/10, net/30 trade discount is almost 37%. Current-Liability Ratios Current-liability ratios indicate the degree to which current debt payments will be required within the year. Understanding a company's liability is critical, since if it is unable to meet current debt, a liquidity crisis looms. The following ratios are compared to industry norms. Formulas Current to Non-current = Current Liabilities Non-current Liabilities Current to Total = Current Liabilities Total Liabilities

Rule of 72 A rule of thumb method used to calculate the number of years it takes to double an investment. Formula 72 Rate of Return Example Paul bought securities yielding an annual return of 9.25%. This investment will double in less than eight years because, 72 = 7.78 years 9.25

Introduction
Looking at a profit and loss account and a balance sheet can give you a clear idea of the health of your business, but for many people these statements are somewhat daunting. However, calculating a few financial ratios can help you to assess quickly how well you are doing and give you early warning of financial problems. This guide explains what ratios are, the types of information they can be used to analyse, and how to go about using them.

Different kinds of ratios.

A ratio is simply a relationship between two numbers. Within your business, you can use ratios to assess the following important financial indicators: Liquidity - the amount of working capital you have available. Solvency - how near you may be to bankruptcy. Efficiency - how good your management is. Profitability- is your business a good investment? Each of these is discussed in more detail below. You can also compare your business's ratios with the same ratios for other businesses operating in a similar environment to you - giving an idea of your relative performance. Ratios are published for many business sectors (sometimes referred to as 'industry norms') which can be used as a comparison. It is useful to compare ratios for different periods, to see what trends and patterns of performance emerge.

Liquidity ratios.
The current assets of your business are its cash or assets such as stock, work in progress, or debts that can be turned into cash. Current liabilities are your immediate trade creditors and your bank overdraft. You should always have sufficient current assets to meet current liability obligations. Liquidity ratios indicate your ability to meet liabilities. Current ratio. The current ratio simply shows the relationship of current assets to current liabilities. In particular, it shows the ability of your business to meet short-term debts with current assets.

This ratio should normally be between 1.5 and 2. Some people argue that the current ratio should be at least 2, on the basis that half the assets might be stock. A ratio of less than 1 (that is, where the current liabilities exceed the current assets) could mean that you are unable to meet debts as they fall due, in which case you are insolvent. A high current ratio could indicate that too much money is tied up in current assets, for example, giving customers too much credit. Quick ratio (acid test). A stricter test of liquidity is the quick ratio or acid test. This ratio measures your ability to meet short-term liabilities from liquid assets such as cash. Some current assets, such as work in progress and stock, may be difficult to turn quickly into cash. Deducting these from the current assets gives the quick assets.

The quick ratio should normally be around 0.7-1. To be absolutely safe, the quick ratio should be at least 1, which indicates that quick assets exceed current liabilities. If the current ratio is rising and the quick ratio is static, there is almost certainly a stockholding problem. Defensive interval The defensive interval is the best measure of impending insolvency and shows the number of days your business can exist if no more cash flows into it. As a guide, it should be 30-90 days, though it depends on the industry.

Solvency ratios.
If the net worth of your business becomes negative - that is, the total liabilities exceed the total assets you have become insolvent. In other words, if you closed, it would not be possible to repay all the people who are owed money. It is an offence to allow yourself to become insolvent, so watch the figures closely. Gearing ratio. The gearing ratio gives an indication of solvency. It is normally defined as the ratio of debt (loans from all sources including debentures, term loans and overdraft) to total finance (which includes shareholders' capital, reserves, long-term debt and overdraft). The higher the proportion of loan finance, the higher the gearing.

Ideally, your gearing should not be greater than 50%, although new, small businesses often do exceed this percentage. If cash flow is stable and profit is fairly stable, then you can afford a higher gearing.

Interest cover In addition to watching the gearing of your business, bankers will also want to be satisfied that you will be able to pay the interest on any loans. So, they look particularly at how many times your profit exceeds their interest charges. A business with low interest cover may be unable to meet future payments if profits were to fall.

Generally, the measure of risk should not be decreasing. There is a problem if the interest cover is lower than 1, and this may indicate potential problems if interest rates were to rise. If it is more than 4, it is very good. Dividend cover. The dividend cover ratio is less important for small private businesses. It is the amount of times that dividends are covered by profits. The stock market benchmark is 2. If dividend cover is less than 1, nothing is being invested to help a business in the long term. However, if dividend cover is greater than 4, shareholders will feel that they are not getting their fair share of the profits.

Efficiency ratios
Efficiency ratios provide a measure of how much working capital is tied up, how quickly the business collects outstanding debts (and pays its creditors) and how effective the business is in making money work. Debtors' turnover ratio The debtors' turnover ratio shows how quickly you are collecting the debts that are due to you.

Ideally, the average debtors for the period should be used. An approximation is given by dividing the sales by the debtors at the end of the period. Dividing this ratio into 365 days gives the average collection period in days.

Tight credit control is essential to every business. The debtors' collection period measures how long it takes to collect cash from a customer after making a sale. The collection period should be kept as short as possible. Many businesses aim to operate on a 30-day period, but often find it is longer than that. Creditors' payment period Monitoring how long it takes to pay suppliers is as important as knowing how long customers take to pay you. If suppliers have to wait too long, they may withdraw credit facilities. The creditors' payment period measures how long you take to pay suppliers for items bought on credit.

Stock turnover ratio Stock will increase in times of expansion and decrease in times of contraction. For some businesses, such as wholesalers and some retailers, a high stock turnover ratio is essential in order to make any profit. A low stock turnover could indicate the presence of slow moving stock, which should be disposed of more quickly.

It is also often helpful to know how quickly the stock is turned over, so you can use the following ratio to calculate your average stockholding period.

Profitability ratios
There are a number of simple profitability indicators that you can use; the gross profit margin is one figure to watch most closely. Gross profit margin The gross profit is the total income for the business less the cost of sales. The gross profit needs to cover all of the fixed costs and, after they have been paid, contributes to the net profit. The gross profit margin is simply the gross profit expressed as a percentage of sales. This is a good figure to compare with others in the same sector.

Net profit margin The net profit of your business is what is left after all your costs (except interest and tax, neither of which are generally regarded as costs) have been deducted. The net profit margin is the net profit expressed as a percentage of sales.

Return on capital employed Some funders will want to know the return on the capital you employ. This shows your ability to generate returns on the funds invested. It will show the element of risk involved in investing in your business. It can be compared with interest rates for investments where there is very low risk - for example, if the same sum of money had been put in a building society or invested on the stock market. For a small business, where the proportion of short term debt is high, you should include equity plus long term debt and short term debt when you calculate the figure for capital employed.

Limitations of ratio analysis

Ratio analysis is a very useful way to interpret your accounts. However, there are several limitations. Inconsistency: When comparing ratios with other businesses, it is not possible to know whether the same accounting methods have been used, even though accounting principles and standards have

been developed. Examples include methods of depreciation and stock valuation where different businesses may use different techniques. Inflation: When ratios are being used to assess trends over a number of years, fluctuations could be due to inflation levels, rather than performance. This could result in misleading figures, so adjustments should be made to reflect the rate of inflation in the periods being considered. Subjectivity: Conclusions drawn from accounting information will reflect any judgements made by those who prepared it. Some of the figures needed for the ratios may not be available, so alternatives will be used which are less precise. It is important to consider this when reading accounts from other businesses. Despite these limitations, ratio analysis is a very useful method of analysing business performance if you compare your ratios to your past performance or to industry norms; don't use them in isolation.

Hints and tips

The key use of ratios is to examine trends and identify problems. Ratios will never solve problems but they might help to identify the factors behind your business's financial problems. The smaller your business, the more important it is to watch the cash flow, rather than relying on ratio analysis. Ratios depend upon accurate, consistent financial information, so keep your accounts up to date.

Liquidity Analysis Ratios Current Ratio Current Ratio = Quick Ratio Quick Ratio = Quick Assets ---------------------Current Liabilities Current Assets -----------------------Current Liabilities

Quick Assets = Current Assets - Inventories Net Working Capital Ratio Net Working Capital Ratio = Net Working Capital -------------------------Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios Return on Assets (ROA) Return on Assets (ROA) = Net Income ---------------------------------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Return on Equity (ROE) Return on Equity (ROE) = Net Income -------------------------------------------Average Stockholders' Equity

Average Stockholders' Equity = (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2 Return on Common Equity (ROCE) Return on Common Equity = Net Income -------------------------------------------Average Common Stockholders' Equity

Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2 Profit Margin

Profit Margin =

Net Income ----------------Sales

Earnings Per Share (EPS) Earnings Per Share = Net Income --------------------------------------------Number of Common Shares Outstanding

Activity Analysis Ratios Assets Turnover Ratio Assets Turnover Ratio = Sales ---------------------------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Accounts Receivable Turnover Ratio Accounts Receivable Turnover Ratio = Sales ----------------------------------Average Accounts Receivable

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods Sold --------------------------Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) / 2

Capital Structure Analysis Ratios Debt to Equity Ratio Debt to Equity Ratio = Total Liabilities ---------------------------------Total Stockholders' Equity

Interest Coverage Ratio Interest Coverage Ratio = Income Before Interest and Income Tax Expenses ------------------------------------------------------Interest Expense

Income Before Interest and Income Tax Expenses = Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios Price Earnings (PE) Ratio Price Earnings Ratio = Market Price of Common Stock Per Share -----------------------------------------------------Earnings Per Share

Market to Book Ratio Market to Book Ratio = Market Price of Common Stock Per Share ------------------------------------------------------Book Value of Equity Per Common Share

Book Value of Equity Per Common Share = Book Value of Equity for Common Stock / Number of Common Shares Dividend Yield Dividend Yield = Annual Dividends Per Common Share -----------------------------------------------Market Price of Common Stock Per Share

Book Value of Equity Per Common Share = Book Value of Equity for Common Stock / Number of Common Shares Dividend Payout Ratio Dividend Payout Ratio = Cash Dividends -------------------Net Income

ROA = Profit Margin X Assets Turnover Ratio ROA = Profit Margin X Assets Turnover Ratio Net Income ROA = ------------------------ = Average Total Assets Profit Margin = Net Income / Sales Assets Turnover Ratio = Sales / Averages Total Assets Net Income -------------- X Sales

Sales ------------------Average Total Ass