Financial ratios are created with the use of numerical values taken from 

financial statements to gain

meaningful information about a company.

Uses and Users of Financial Ratio Analysis

Analysis of financial ratios serves two main purposes:

1. Track company performance

Determining individual financial ratios per period and tracking the change in their values over time is
done to spot trends that may be developing in a company. For example, an increasing debt-to-asset
ratio may indicate that a company is overburdened with debt and may eventually be facing default risk.

2. Make comparative judgments regarding company performance

Comparing financial ratios with that of major competitors is done to identify whether a company is
performing better or worse than the industry average. For example, comparing the return on assets
between companies helps an analyst or investor to determine which company is making the most
efficient use of its assets. 

Users of financial ratios include parties external and internal to the company:

1. External users: 

Financial analysts, retail investors, creditors, competitors, tax authorities, regulatory authorities, and
industry observers

2. Internal users: 

Management team, employees, and owners

Liquidity Ratios are financial ratios that measure a company’s ability to repay both short- and long-term
obligations.

Common liquidity ratios include the following:

The current ratio measures a company’s ability to pay off short-term liabilities with current assets:
Current ratio = Current assets / Current liabilities
 
The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets:
Acid-test ratio = Current assets – Inventories / Current liabilities
 
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash
equivalents:

Cash ratio = Cash and Cash equivalents / Current Liabilities

 
The operating cash flow ratio is a measure of the number of times a company can pay off current
liabilities with the cash generated in a given period:
Operating cash flow ratio = Operating cash flow / Current liabilities

Leverage Financial Ratios measure the amount of capital that comes from debt. In other words,
leverage financial ratios are used to evaluate a company’s debt levels. Common leverage ratios include
the following:

The debt ratio measures the relative amount of a company’s assets that are provided from debt:
Debt ratio = Total liabilities / Total assets
 
The debt to equity ratio calculates the weight of total debt and financial liabilities against shareholders’
equity:
Debt to equity ratio = Total liabilities / Shareholder’s equity
 
The interest coverage ratio shows how easily a company can pay its interest expenses:
Interest coverage ratio = Operating income / Interest expenses
 
The debt service coverage ratio reveals how easily a company can pay its debt obligations:
Debt service coverage ratio = Operating income / Total debt service

Efficiency Ratios also known as activity financial ratios, are used to measure how well a company is
utilizing its assets and resources. Common efficiency ratios include:

The asset turnover ratio measures a company’s ability to generate sales from assets:

Asset turnover ratio = Net sales / Average total assets
 
The inventory turnover ratio measures how many times a company’s inventory is sold and replaced
over a given period:
Inventory turnover ratio = Cost of goods sold / Average inventory
 
The accounts receivable turnover ratio measures how many times a company can turn receivables into
cash over a given period:
Receivables turnover ratio = Net credit sales / Average accounts receivable
 
The days sales in inventory ratio measures the average number of days that a company holds on to
inventory before selling it to customers:

Days sales in inventory ratio = 365 days / Inventory turnover ratio

 
Profitability Ratios measure a company’s ability to generate income relative to revenue, balance sheet
assets, operating costs, and equity. Common profitability financial ratios include the following:

The gross margin ratio compares the gross profit of a company to its net sales to show how much profit
a company makes after paying its cost of goods sold:
Gross margin ratio = Gross profit / Net sales
 
The operating margin ratio compares the operating income of a company to its net sales to determine
operating efficiency:
Operating margin ratio = Operating income / Net sales
 
The return on assets ratio measures how efficiently a company is using its assets to generate profit:
Return on assets ratio = Net income / Total assets
 
The return on equity ratio measures how efficiently a company is using its equity to generate profit:
Return on equity ratio = Net income / Shareholder’s equity
 
Market Value Ratios are used to evaluate the share price of a company’s stock. Common market value
ratios include the following:
The book value per share ratio calculates the per-share value of a company based on the equity
available to shareholders:

Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total common shares
outstanding
 
The dividend yield ratio measures the amount of dividends attributed to shareholders relative to the
market value per share:

Dividend yield ratio = Dividend per share / Share price

 
The earnings per share ratio measures the amount of net income earned for each share outstanding:
Earnings per share ratio = Net earnings / Total shares outstanding
 
The price-earnings ratio compares a company’s share price to its earnings per share:
Price-earnings ratio = Share price / Earnings per share

Financial Ratios - Complete List and Guide to All Financial Ratios (corporatefinanceinstitute.com)

 
Financial ratio analysis is performed by comparing two items in the financial statements. The resulting
ratio can be interpreted in a way that is more insightful than looking at the items separately.
WHAT'S IN HERE

This page summarizes all of the most commonly used ratios and metrics in financial analysis.

Financial ratios and metrics can be classified into those that measure:

profitability,

liquidity,

management efficiency,

leverage, and

valuation & growth.

...

List of Financial Ratios

Here is a list of various financial ratios. Take note that many of the ratios are often expressed in
percentage - just multiply them by 100%. Each ratio is also briefly described.

Profitability Ratios
Gross Profit Rate = Gross Profit ÷ Net Sales
Evaluates how much gross profit is generated from sales. Gross profit is equal to net sales ( sales
minus sales returns, discounts, and allowances) minus cost of sales.
Return on Sales = Net Income ÷ Net Sales
Also known as "net profit margin" or "net profit rate", it measures the percentage of income derived
from dollar sales. Generally, the higher the ROS the better.

Return on Assets = Net Income ÷ Average Total Assets

In financial analysis, it is the measure of the return on investment. ROA is used in evaluating
management's efficiency in using assets to generate income.

Return on Stockholders' Equity = Net Income ÷ Average Stockholders' Equity

Measures the percentage of income derived for every dollar of owners' equity.

Liquidity Ratios
Current Ratio = Current Assets ÷ Current Liabilities
Evaluates the ability of a company to pay short-term obligations using current assets (cash, marketable
securities, current receivables, inventory, and prepayments).

Acid-Test Ratio = Quick Assets ÷ Current Liabilities

Also known as "quick ratio", it measures the ability of a company to pay short-term obligations using
the more liquid types of current assets or "quick assets" (cash, marketable securities, and current
receivables).

Cash Ratio = ( Cash + Marketable Securities ) ÷ Current Liabilities

Measures the ability of a company to pay its current liabilities using cash and marketable securities.
Marketable securities are short-term debt instruments that are as good as cash.

Net Working Capital = Current Assets - Current Liabilities

Determines if a company can meet its current obligations with its current assets; and how much excess
or deficiency there is.

Management Efficiency Ratios

Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Measures the efficiency of extending credit and collecting the same. It indicates the average number of
times in a year a company collects its open accounts. A high ratio implies efficient credit and collection
process.

Days Sales Outstanding = 360 Days ÷ Receivable Turnover

Also known as "receivable turnover in days", "collection period". It measures the average
number of days it takes a company to collect a receivable. The shorter the DSO, the better. Take note
that some use 365 days instead of 360.

Inventory Turnover = Cost of Sales ÷ Average Inventory

Represents the number of times inventory is sold and replaced. Take note that some authors use Sales
in lieu of Cost of Sales in the above formula. A high ratio indicates that the company is efficient in
managing its inventories.

Days Inventory Outstanding = 360 Days ÷ Inventory Turnover

Also known as "inventory turnover in days". It represents the number of days inventory sits in the
warehouse. In other words, it measures the number of days from purchase of inventory to the sale of
the same. Like DSO, the shorter the DIO the better.

Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable

Represents the number of times a company pays its accounts payable during a period. A low ratio is
favored because it is better to delay payments as much as possible so that the money can be used for
more productive purposes.
Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover
Also known as "accounts payable turnover in days", "payment period". It measures the
average number of days spent before paying obligations to suppliers. Unlike DSO and DIO, the longer
the DPO the better (as explained above).

Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding

Measures the number of days a company makes 1 complete operating cycle, i.e. purchase merchandise,
sell them, and collect the amount due. A shorter operating cycle means that the company generates
sales and collects cash faster.

Cash Conversion Cycle = Operating Cycle - Days Payable Outstanding

CCC measures how fast a company converts cash into more cash. It represents the number of days a
company pays for purchases, sells them, and collects the amount due. Generally, like operating cycle,
the shorter the CCC the better.

Total Asset Turnover = Net Sales ÷ Average Total Assets

Measures overall efficiency of a company in generating sales using its assets. The formula is similar to
ROA, except that net sales is used instead of net income.

Leverage Ratios
Debt Ratio = Total Liabilities ÷ Total Assets
Measures the portion of company assets that is financed by debt (obligations to third parties). Debt ratio
can also be computed using the formula: 1 minus Equity Ratio.

Equity Ratio = Total Equity ÷ Total Assets

Determines the portion of total assets provided by equity (i.e. owners' contributions and the company's
accumulated profits). Equity ratio can also be computed using the formula: 1 minus Debt Ratio.

The reciprocal of equity ratio is known as equity multiplier, which is equal to total assets divided by
total equity.

Debt-to-Equity Ratio = Total Liabilities ÷ Total Equity

Evaluates the capital structure of a company. A D/E ratio of more than 1 implies that the company is a
leveraged firm; less than 1 implies that it is a conservative one.

Times Interest Earned = EBIT ÷ Interest Expense

Measures the number of times interest expense is converted to income, and if the company can pay its
interest expense using the profits generated. EBIT is earnings before interest and taxes.

Valuation and Growth Ratios

Earnings per Share = ( Net Income - Preferred Dividends ) ÷ Average Common Shares
Outstanding

EPS shows the rate of earnings per share of common stock. Preferred dividends is deducted from net
income to get the earnings available to common stockholders.

Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share

Used to evaluate if a stock is over- or under-priced. A relatively low P/E ratio could indicate that the
company is under-priced. Conversely, investors expect high growth rate from companies with high
P/E ratio.
Dividend Pay-out Ratio = Dividend per Share ÷ Earnings per Share
Determines the portion of net income that is distributed to owners. Not all income is distributed since a
significant portion is retained for the next year's operations.

Dividend Yield Ratio = Dividend per Share ÷ Market Price per Share
Measures the percentage of return through dividends when compared to the price paid for the stock. A
high yield is attractive to investors who are after dividends rather than long-term capital appreciation.

Book Value per Share = Common SHE ÷ Average Common Shares

Indicates the value of stock based on historical cost. The value of common shareholders' equity in the
books of the company is divided by the average common shares outstanding.