Financial Ratio

How to Calculate It

What It Tells You

Working Capital

Current Ratio

Quick Ratio (Acid Test Ratio)

Receivables Turnover

Days Sales Outstanding (Average Collection Period)

Inventory Turnover

Days Sales on Hand Gross Margin

Profit Margin (after tax)

LIQUIDITY RATIOS Current Assets Current Liabilities An indicator of whether the company will be able to meet its current obligations. 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 Assets Current Liabilities This tells you the relationship of current assets to current liabilities. A ratio of 3:1 is better than 2:1. A 1:1 ratio means there is no working capital. [(Cash + Temp. Investments + This ratio is similar to the current ratio except that Accounts Receivable) Current Inventory, Supplies, and Prepaid Expenses are Liabilities] : 1 excluded. This indicates the relationship between the amount of assets that can quickly be turned into cash versus the amount of current liabilities. Net Credit Sales Average Net This calculates the number of times in an operating Receivable cycle (normally one year) the company collects its receivable balance. Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the year divided by two. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly. 365 days Receivables Turnover This s a variation of receivables turnover. It calculates the number of days it will take to collect the average receivables balance. It is often used to evaluate the effectiveness of a company's credit and collection policies. A rule of thumb is the average collection period should not be significantly greater than a company's credit term period. COGS Average Inventory Measures the number of times the company sells its inventory during the period. It is calculated by dividing the cost of goods sold by average inventory. Average inventory is calculated by adding beginning inventory and ending inventory and dividing by 2. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly. 365 days Inventory Turnover A variation of the inventory turnover. It calculates the number of day's sales being carried in inventory. PROFITABILITY RATIOS Gross Profit Net Sales Indicates the percentage of sales dollars available for expenses and profit after the cost of merchandise is deducted from sales. The gross margin varies between industries and often varies between companies within the same industry. Net Income after Tax Net Sales Tells you the profit per sales dollar after all expenses are deducted from sales. This margin will vary between industries as well as between companies in the same industry. It measures the company's ability to turn its sales

Assets Turnover Return on Assets

Net Sales Average Total Assets Net Income Average Total Assets OR Profit Margin x Asset Turnover

Earnings Per Share (EPS)

Net Income after Tax Weighted Average Number of Common Shares Outstanding

Return on Stockholders' Equity (after tax) Price-earnings Ratio Payout Ratio Dividend Yield

Net Income for the Year after Taxes Average Stockholders' Equity during the Year

Market price per common share Earnings per share Cash Dividends Net Income Dividends Paid Per Share Market Price of One Share of Common Stock at Period End

into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. Measures how efficiently a company is using its assets. The turnover value varies by industry. Considered an overall measure of profitability. It measures how much net income was generated for each $1 of assets the company has. ROA is a combination of the profit margin ratio and the asset turnover ratio. Expresses the corporations net income after taxes on a per share of common stock basis. The computation requires the deduction of preferred dividends from the net income if a corporation has preferred stock. Also requires the weighted average number of shares of common stock during the period of the net income. Reveals the percentage of profit after income taxes that the corporation earned on its average common stockholders' balances during the year. If a corporation has preferred stock, the preferred dividends must be deducted from the net income. It represents the investors expectations for the stock. A P/E ratio greater than 15 has historically been considered high. Identifies the percent of net income paid to common stockholders in the form of cash dividends. It measures the return in cash dividends earned by an investor on one share of the company's stock.

SOLVENCY RATIOS Debt to Total Assets Times Interest Earned Total debt Total Assets Earnings for the Year before Interest and Income Tax Expense Interest Expense for the Year Calculates the percent of assets provided by creditors. Total debt is the same as total liabilities. Indicates a company's ability to meet the interest payments on its debt. In the example the company is earning 3.3 times the amount it is required to pay its lenders for interest.