Financial Ratios



Financial Ratios

|This column is the name|This column is the formula used |This column describes how |

|of the ratio |to calculate the ratio? |the ratio is used. |

|PROFITABILITY RATIOS |

|Return on Total Assets |Net Income ÷ Average Total Assets |Shows productivity of the company in terms of its use of |

| | |assets to generate profits. |

|Return on Equity |Net Income available to Common |This ratio shows how efficiently the company is using common|

| |Stockholders ÷ Average Common |shareholder's equity. |

| |Stockholders' Equity | |

|EFFICIENCY RATIOS |

|Age of Receivables |Average AR (net) x 365 ÷ Net Credit |This ration gives an average of the collection period for |

| |Sales |credit sales. |

|Inventory Turnover |Cost of Sales ÷ Average Inventory |How much inventory are you carrying? How long does it take |

| | |you to sell it? The Inventory Turnover ratio tells you the |

| | |number of times inventory was sold in the period. |

|OPERATING OR ACTIVITY RATIOS |

|Percentage change |Current Year Net Sales - Prior Year Net Sales/Prior |This is simply a measure of the change in sales from one |

|in Sales |Year Net Sales |year to the next. |

|Gross Profit |Net Sales - Cost of Sales ÷ Net Sales |Wondering how much that sale you just made will amount to in|

|Percentage | |gross profit? This ratio shows how much of every dollar of |

| | |net sales becomes gross profits. |

|Operating Expenses as a|Operating Expenses ÷ Net Sales |This is a calculation to tell you how much of every net |

|Percentage of | |sales dollar went towards operating expenses. |

|Sales | | |

|Bad Debt as a |Bad Debt Expense ÷ Net Credit |Ever wondered about your credit policies? This ratio will |

|Percentage of Sales |Sales |illustrate the effectiveness of the your businesses credit |

| | |policies. |

|Repairs and |Repairs and Maintenance Expense ÷ |How much are you spending on repairs and maintenance? This |

|Maintenance as a |Net Fixed Assets |ratio can help you in making decisions about equipment |

|Percentage of Net Fixed| |replacement. |

|Assets | | |

|LIQUIDITY RATIOS |

|Current Ratio |Current Assets ÷ Current Liabilities |Shows the company's ability to meet its current obligations |

| | |(or pay off debt). |

|Quick Ratio |Current Assets - Inventory – Prepaid items ÷ Current |This is similar to the Current Ratio. The difference is |

| |Liabilities |that it does not include assets that cannot be quickly |

| | |converted to cash. The higher the number, the more liquid |

| | |the company. |

|LEVERAGE RATIOS |

|Debt Ratio |Debt ÷ Total Assets |This gives an indication of the ability of the company to |

| | |absorb losses without risking assets. |

|Times Interest |Operating Income ÷ Annual Interest |Used with the debt to equity ratio (which is simply |

|Earned |Payments |calculated by dividing debt by stockholders’ equity) |

| | |to focus on cash flow necessary to service long-term debt |

| | |payments |

|Debt Service |Net Income + Depreciation ÷ Annual |This one is all about cash flow. It is an indicator of your |

|Coverage |Principal Payments |ability to cover principal payments with current cash flows.|

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