FINANCIAL RATIOS HOW TO CALCULATE IT WHAT IT TELLS YOU

LIQUIDITY RATIOS

= (Cash and Cash Equivalents + Indicates how well a company can

Acid-Test Ratio Accounts Receivable + Short-term meet its short-term obligations with
Investments) / Current Liabilities its most liquid assets.

Shows the ability of a business to

Cash Ratio = Cash and Cash Equivalents / repay its current liabilities by only
Current Liabilities using its cash and cash equivalent.

Indicates the company's ability to

Current Ratio = Current Assets / Current pay its current liabilities from its
Liabilities current assets.

Working Capital Ratio = Current Assets - Current Shows the measure of liquid
Liabilities resources that management will
control in the short term.
PROFITABILITY RATIOS

Indicates how well a company

Margin Ratios controls the cost of its inventory and
* Gross Profit Margin = Gross Profit / Net Sales mfg. Of its products and
subsequently pass on the cost to its
customer.

Shows the measure of overall

Operating Profit = Ebit / Net Sales operating efficiency incorporating all
Margin of the expenses of ordinary daily
business.

Net profit margin = Net Income / Net Sales Shows how much of each sales
dollar shows up as net income after
all expenses are paid.

Cash flow margin = Cash flow from operating Express the ability of a firm to
activities / Net sales translate sales into cash.

Return on Assets = Net income / Total Asset Shows the amount of profit earned
relative to the firm's level of
investment in total assets.

Return on Equity = Net income / Shareholder's Shows the return on the money the
equity investors have put into the company.
 Shows the return on assets since it
Cash return on asset = Cash flow from operating is a cash comparison to this ratio as
account / total asset return on asset is stated on accrual
basis.
LEVERAGE RATIOS

Debt ratio = Total liabilities / total asset Shows the company's ability to pay
off its liabilities with its assets.

Shows the percentage of company's

Debt-to-Equity Ratio = Total Liabilities / Total Equity financing that comes from creditors
and investors

Shows the amount of assets that are

Equity Ratio = Total Equity / Total Asset financed by owner's investment

= Current year amount - Base Allows investors and analysts to

Horizontal Analysis/ year amount / Base year amount determine how a company has
Trend Analysis x 100 grown over time.

Market value ratio/ Compare the market price to the

Price per earnings = Stock price / earnings per share calculated from
ratio Earnings per share the latest income statement.

Market to book value = Stock Price / Book Value per Shows the total value of the equity
ratio Share on its balance sheet. That's equal to
the value of assets less liabilities to
outsiders.
ASSET MANAGEMENT RATIOS

Represents the average number of

Average collection =Accounts Receivables / Average days the firm takes to collect
period Daily Sales receivables.

Inventory Turn-over = Cost of Goods Sold / Inventory Measure whether the firm has
excess funds tied up in inventory.

Fixed Asset Turn-over = Sales / Fixed Assets Measure the relationship of the
firm’s assets to a year’s sales.