Liquidity Analysis Ratios   

   
Current Ratio
 
    Current Assets
  Current Ratio = ————————
    Current Liabilities
      
 
Quick Ratio
 
    Quick Assets
  Quick Ratio = ———————-
    Current Liabilities
     
 
Quick Assets = Current Assets – Inventories
   
 
Net Working Capital Ratio
 
    Net Working Capital
  Net Working Capital Ratio = ————————–
    Total Assets
     
 
Net Working Capital = Current Assets – Current Liabilities
   
 
Profitability Analysis Ratios   
Return on Assets (ROA)
 
    Net Income
  Return on Assets (ROA) = ———————————-
    Average Total Assets
     
 
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
   
 
Return on Equity (ROE)
 
    Net Income
  Return on Equity (ROE) = ——————————————–
    Average Stockholders’ Equity
     
 
Average Stockholders’ Equity 
= (Beginning Stockholders’ Equity + Ending Stockholders’ Equity) / 2
   
 
Return on Common Equity (ROCE)
 
    Net Income
  Return on Common Equity (ROCE) = ——————————————–
    Average Common Stockholders’ Equity
     
 
Average Common Stockholders’ Equity 
= (Beginning Common Stockholders’ Equity + Ending Common Stockholders’ Equity) / 2
   
 
Profit Margin
 
    Net Income
  Profit Margin = —————–
    Sales
     
 
     
 
Earnings Per Share (EPS)
 
    Net Income
  Earnings Per Share (EPS) = ———————————————
    Number of Common Shares Outstanding
     
 
   
 
Activity Analysis Ratios   
Assets Turnover Ratio
 
    Sales
  Assets Turnover Ratio = —————————-
    Average Total Assets
     
 
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
   
 
Accounts Receivable Turnover Ratio
 
    Sales
  Accounts Receivable Turnover Ratio = ———————————–
    Average Accounts Receivable
     
 
Average Accounts Receivable 
= (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
   
 
Inventory Turnover Ratio
 
    Cost of Goods Sold
  Inventory Turnover Ratio = —————————
    Average Inventories
     
 
Average Inventories = (Beginning Inventories + Ending Inventories) / 2
   
 
Capital Structure Analysis Ratios   
Debt to Equity Ratio
 
    Total Liabilities
  Debt to Equity Ratio = ———————————-
    Total Stockholders’ Equity
     
 
     
 
Interest Coverage Ratio
 
    Income Before Interest and Income Tax Expenses
  Interest Coverage Ratio = ——————————————————-
    Interest Expense
     
 
Income Before Interest and Income Tax Expenses 
= Income Before Income Taxes + Interest Expense
   
 
Capital Market Analysis Ratios   
Price Earnings (PE) Ratio
 
    Market Price of Common Stock Per Share
  Price Earnings (PE) Ratio = ——————————————————
    Earnings Per Share
     
 
     
 
Market to Book Ratio
 
    Market Price of Common Stock Per Share
  Market to Book Ratio = ——————————————————-
    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
 
    Annual Dividends Per Common Share
  Dividend Yield = ————————————————
    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
 
    Cash Dividends
  Dividend Payout Ratio = ——————–
    Net Income
     
 
     
 
ROA = Profit Margin X Assets Turnover Ratio   
ROA = Profit Margin X Assets Turnover Ratio
 
    Net Income Net Income Sales
  ROA = ————————  = ————–  X ————————
    Average Total Assets  Sales Average Total Assets 
         
 
Profit Margin = Net Income / Sales 
Assets Turnover Ratio = Sales / Averages Total Assets
 
Financial statement analysis includes financial ratios. Here are three financial ratios that are based
solely on current asset and current liability amounts appearing on a company’s balance sheet:
Financial Ratio   How to Calculate It What It Tells You
Working Capital = Current Assets – Current Liabilities An indicator of whether the company will
= $89,000 – $61,000 be able to meet its current obligations (pay
= $28,000 its bills, meet its payroll, make a loan
payment, etc.) If a company has current
assets exactly equal to current liabilities, it
has no working capital. The greater the
amount of working capital the more likely it
will be able to make its payments on time.
Current Ratio = Current Assets ÷ Current Liabilities This tells you the relationship of current
= $89,000 ÷ $61,000 assets to current liabilities. A ratio of 3:1 is
= 1.46 better than 2:1. A 1:1 ratio means there is no
working capital.
Quick Ratio = [(Cash + Temp. Investments + Accounts This ratio is similar to the current ratio
(Acid Test Ratio) = Receivable) ÷ Current Liabilities] : 1 except that Inventory, Supplies, and
= [($2,100 + $100 + $10,000 + $40,500) ÷ Prepaid Expenses are excluded. This
= $61,000] : 1 indicates the relationship between the
[$52,700 ÷ $61,000] : 1 amount of assets that can quickly be turned
0.86 : 1 into cash versus the amount of current
liabilities.
 
Four financial ratios relate balance sheet amounts for Accounts Receivable and Inventory to
income statement amounts. To illustrate these financial ratios we will use the following income
statement information:
Example Corporation
Income Statement
For the year ended December 31, 2009
 
Sales (all on credit) $500,000
Cost of Goods Sold   380,000
  Gross Profit   120,000
 
Operating Expenses  
  Selling Expenses 35,000
  Administrative Expenses    45,000
    Total Operating Expenses    80,000
 
Operating Income 40,000
  Interest Expense    12,000
 
Income before Taxes 28,000
  Income Tax Expense     5,000
 
Net Income after Taxes $ 23,000
 
     
 
 
Financial Ratio   How to Calculate It What It Tells You
Accounts = Net Credit Sales for the Year The number of times per year that the
Receivable = ÷ AverageAccounts Receivable for accounts receivables turn over. Keep in
Turnover = the Year mind that the result is an average, since
$500,000 ÷ $42,000 (a computed credit sales and accounts receivable are
average) likely to fluctuate during the year. It is
11.90 important to use the average balance of
accounts receivable during the year.
Days’ Sales in = 365 days in Year ÷ Accounts Receivable The average number of days that it took to
Accounts = Turnover in Year collect the average amount of accounts
Receivable = 365 days ÷ 11.90 receivable during the year. This statistic is
30.67 days only as good as the Accounts Receivable
Turnover figure.
Inventory = Cost of Goods Sold for the Year The number of times per year that
Turnover = ÷ Average Inventory for the Year Inventory turns over. Keep in mind that
= $380,000 ÷ $30,000 (a computed the result is an average, since sales and
average) inventory levels are likely to fluctuate
12.67 during the year. Since inventory is at cost
(not sales value), it is important to use the
Cost of Goods Sold. Also be sure to use the
average balance of inventory during the
year.
Days’ Sales in = 365 days in Year ÷ Inventory Turnover in The average number of days that it took to
Inventory = Year sell the average inventory during the year.
= 365 days ÷ 12.67 This statistic is only as good as the
28.81 Inventory Turnover figure.
 
The next financial ratio involves the relationship between two amounts from the balance sheet: total
liabilities and total stockholders’ equity:
Financial Ratio   How to Calculate It What It Tells You
Debt to Equity = (Total liabilities ÷ Total Stockholders’ The proportion of a company’s assets
= Equity) : 1 supplied by the company’s creditors versus
= ( $481,000 ÷ $289,000) : 1 the amount supplied the owner or
1.66 : 1 stockholders. In this example the creditors
have supplied $1.66 for each $1.00 supplied
by the stockholders.
Advertisements