Since 1996, JaxWorks has offered a suite of Free Excel workbooks and spreadsheets, and associated MS Word, PDF

and HTML documents, that cover a number of financial, accounting and sales functions. These are invaluable small business tools. Also included Free are: - business plan tools, including spreadsheets and excellent instructions - Excel functions glossary and guide; - free training courses for most Microsoft Office applications. These guides are in PDF format and rival commercial books! - comprehensive list of acronyms, ratios and formulas in customer financial analysis, and financial terms; - suite of online calculators, including, breakeven analysis, productivity analysis, business evaluation; - Altman Z-Score (covering publicly and privately held firms, and small businesses); - and payroll analysis. If you are involved in financial analysis at any level, or want to learn more about MS Excel and other applications in the Of fice suite this site is invaluable.

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. 2010.Instructions Ratios Introduction Income Statement Balance Sheet Earnings Per Share Gross Profit Margin Net Profit Margin Return on Assets Return on Equity Current Ratio Quick Ratio Average Collection Period Inventory Turnover Debt Ratio Equity Ratio Times Interest Earned © Copyright. All Rights Reserved. Jaxworks.

Instructions Please Read This Page Carefully Data Entry The "Income Statement" and "Balance Sheet" are your two data entry worksheets. All pages have a return button to it. Point Here © Copyright. The "Index Worksheet" is your transportation page. Navigation: 1. Additional Instructions: 1. Look for the red corner triangles for additional instructions on the worksheets. . 2010. You may print multiple pages by holding down the CONTROL-KEY and clicking on individual TABS or Right click on a tab and "select all sheets". All pages are setup to print. Be sure to "Print Preview" before printing a page. JaxWorks. 2. For example:>>>> Printing: 1. All Rights Reserved.

JaxWorks. the greater your profit margin. the primary goal-of these activities is to produce income through effective use of its resources. and how well. it might be difficult to find funds either to make the loan payments or to cover your other expenses. representative. Analyzing Leverage Ratios The term "leverage" means the purchase of assets with borrowed money. you are using another type of leverage. then the investment is unattractive. 2010. and leverage ratios: Category Profitability ratios Ratio Earnings Per Share Gross Profit Margin Net Profit Margin Return on Assets Return on Equity Current Ratio Quick Ratio Average Collection Period Inventory Turnover Debt Ratio Equity Ratio Times Interest Earned Liquidity ratios Activity ratios Leverage ratios This is by no means an exhaustive list of the ratios that have been developed to help analyze a company's financial position and the way that it conducts business. A company may have considerable total assets. and in light of other ratios that describe the company's operations and financial structure. If the company hopes to increase its worth in the marketplace by enhancing or expanding its product line. More frequently. Keep in mind that it's important to evaluate a financial ratio in terms of its trend over time. liquidity ratios. One primary goal-perhaps. you could make the business cards yourself. you pay one of your suppliers 50 percent of the revenue to print them for you. Your credit rating might fall. then an important source of capital to make improvements is its profit margin.Ratios Introduction This workbook produces 12 important financial ratios. making it more costly for you to borrow other money. the greater your cost. All Rights Reserved. a company conducts its business. to retire the loan. Creditors want their loans to be paid in the medium of cash. of a standard such as an industry average. Summary This workbook has some of the financial ratios that are important to understanding how. but related. both positive and negative. activity ratios. but their principal forms follow the formulas illustrated. but if those assets are difficult to convert to cash it is possible that the company might be unable to pay its creditors in a timely fashion. as you might expect. If you borrow money to acquire the printing equipment. But if you do not sell enough cards to cover the loan payment. Analyzing Activity Ratios There are various ratios that can give you insight into how well a company manages its operating and sales activities. those dividends must come out of its profits. not in a medium such as inventory or factory equipment. if the return on assets is less than the cost of borrowing money to acquire assets. If the company intends to pay dividends to its stockholders. the greater your profit margin. The cost is still fixed at however much money you must pay. When you receive an order for business cards. This is a variable cost: the more you sell. Leverage is a financial tool that accelerates changes in income. These ratios are usually thought of as belonging to four basic categories: profitability ratios. at regular intervals. © Copyright. There are variations on virtually every ratio discussed here. The more cards you sell. . From the standpoint of creditors. its profitability is a major concern. however. because the marketplace imposes different demands on different lines of business. Analyzing Liquidity Ratios The issue of liquidity. concerns creditors. means of evaluating a company's profitability. A company's creditors and investors are interested in how much leverage has been used to acquire assets. In that case. But if you purchase the necessary printing equipment. Only occasionally can you calculate one of these indicators and gain immediate insight into a business operation. you could lose money. you can usually understand one ratio by considering it in the context of another ratio (the debt ratio and the return on assets is a good example of one ratio providing the context for another). it is necessary to know the sort of business that a company conducts. The investor could obtain a better return in different ways-one way would be to loan funds rather than to invest them in the company. So doing would turn a variable cost into a fixed cost: no matter how many cards you sell. Again. Two ways to measure this effectiveness are the Average Collection Period and the Inventory Turnover rate. the more cards you sell. Suppose that your company retails office supplies. It is. Analyzing Profitability Ratios If you are considering investing money in a company. termed financial leverage. This effect is termed operating leverage. Furthermore. and there are ratios that were not covered at all. Liquidity is a company's ability to meet its debts as they come due. From the investors' standpoint. a high degree of leverage represents risk because the company might not be able to repay a loan. There are several different. the cost of printing them is fixed at however much you paid for the printing equipment.

250 $477.369 $100.000 $467.616 $1.542 $97.000 $60.700 $325.000 $134.055.000 $581.000 $100.000 $240.374 $5.100 $946.700 $518.484 $424.000 $20.010.958 $1.700 $370.058 $139.663 $227.722.000 $945.250 $33.220.700 $200.000 $125.484 1ST QTR Sales Sales Cost of sales Gross profit Expenses Operating expenses Interest Depreciation Amortization Total expenses Operating income Other income and expenses Gain (loss) on sale of assets Other (net) Subtotal $2.000 $125.191.000.115 $1.000 $16.000.810.000 $605. 2010.700 Income before tax Please enter a tax percentage Taxes @ 30% Net income Detailed Supporting Information Cost of sales Direct labor Materials Other costs $701.000 $120.000 $208.000 $125.250 $474.000 $10. .958 $1.500 $1.000 $103.COMPANY NAME Company Address City.069 $738.000 $16. State ZIP Code Phone Number fax Fax Number ANNUAL INCOME STATEMENT Forecasted 2ND QTR 3RD QTR $1.616 $2.000 $3.250 $33.100 $3.885 $1.000 © Copyright. All Rights Reserved.000 $1.250 $32.500.089.000 $500.616 $3.063.475 $834.000 $500.648.572.741 $65.000 $500.000 $125.250 $369.000 $635.000 $888.879 $242.250 $33.589.250 $327. JaxWorks.141 $16.059 $1.000 $1.599 $585.000 $833.958 $1.300.883 $170.458 $265.585 $357.000 4TH QTR $2.000 $210.616 $500.300 $490.461.600 $16.942 $426.321 $1.000 $865.443.000 $1.000 Total 1999 $6.000 $50.748 $320.000 $318.000 $321.000 $405.109 $2.942 $72.000 $500.000 $1.542 $275.

438.090 $1.767 $50.000 $90.000 Actual 1999 $50.000.000 $25.896 $328.178 $76.000 $100.000 $1.211.000 $25.000 $350.534 $630.266.397 $575.151 $590.000 $100.855 $1.000 $90.541.000 $2.750 $26.000 $50.000 $50. All Rights Reserved.000 $3.505.000 $1.464.000 $1.137 $12.226.000 $3.000 1.000 $90.196 $427.COMPANY NAME Company Address City.000 $500.000 $52.288 $12.897.896 1.000 $183.000 $90.000 $466.000 $50.320 $1.887 1.458 $1.055 $50.250 $5.890.000 $328.000 $100.962.000 $50.262.000 $100.000 $400.000 $40.000 $400.000 $125.324.983 $54.475.000 $2.305 $229. State ZIP Code Phone Number fax Fax Number ANNUAL BALANCE SHEET Actual 2002 ASSETS Current Assets Cash and cash equivalents Accounts receivable Inventory Other current assets Total Current Assets Fixed Assets Land Buildings Equipment Subtotal Less-accumulated depreciation Total Fixed Assets Intangible Assets Cost Less-accumulated amortization Total Intangible Assets Other assets Total Assets 1ST QTR Forecast 2ND QTR 3RD QTR 4TH QTR $451.266.000 $23.000 $100.000 $936.000 $100.157 $1.500 $500.000 $1.091 ($945.000 $27.374 $1.000 $22.939.360 $657.000 $2.000 $3.475 $50.475 $500.550.500 $27.767 $50.462.000 $27.174.000 $1.000 $385.000 $1.663 $62.000 $605.489.186.500.411 $60.000 $100.000 $1.708 $12.450.450.000 $30.505.040.500 $432.000 $2.000 $20.500 $1.626 $50.740 1.887 $328.000 $100.000 $875.000 $757.000 $100.000 $16.750 $33.000 $14.000 $2.000 $1.000 $23.157 $2.084 $150.542 $137.000 $100.983.000 $90.940.000 $100.579 $3.000 $2.355 $328.000 $3.000 $27.000 $951.000 $1.425 $50.000 $30.747.042.271 $100.716.959 $45.000 $25.000 $559.002 $50.450.355 1.000 $2. .000 $1.500 $1.700 $2.425 $500.500 $2.000 $875.000 $875.005.216.735) $83.939.450.000 $10.400. 2010.433 $469.000 ($188.400.000 $2.740 $600.416 $1.000 $112.767 $50.000 $100.000 $1.897 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable Notes payable Current portion of long-term debt Income taxes Accrued expenses Other current liabilities Total Current Liabilities Non-Current Liabilities Long-term debt Deferred income Deferred income taxes Other long-term liabilities Total Liabilities Shares Outstanding Capital stock issued Additional paid in capital Retained earnings 1ST QTR Forecast 2ND QTR 3RD QTR 4TH QTR $600. JaxWorks.586) $660.000 $90.000 $50.000 $40.000 $800.538 $2.000 $40.897 Total Liabilities and Equity © Copyright.000 $27.000 $50.000 $1.000 $1.700 $3.000 $30.000 $875.000 $534.489.250 $28.233 $493.000 $21.466 $12.000 $2.579 $2.055 $500.767 $50.358.437.500 $120.541.000 $1.548.076.300 $83.538 $3.450.000 $90.000 $3.

000 $228 Quarter 3 $170.000 $170 Quarter 4 $834. or retaining that income to invest in research. it pays dividends at a different (usually. In either case. Preferred stock is often callable at the company's discretion. JaxWorks. These two objectives might both be met. and expanded operations. Earnings Per Share (EPS) is an important measure of the company's income.700 1. thus making the company more profitable and increasing the market value of its stock. or to obtain a profit by owning the stock as the market value of its shares increases. Note that the EPS can decline steadily throughout the year.Preferred Dividends) / Shares of Common Stock Outstanding © Copyright. Preferred stock is issued under different conditions than common stock. but in practice they often are not. The hope.059 1.000 $834 Earnings Per Share (EPS) Depending on your financial objectives.109 1. perhaps making the stock appear a more attractive investment. 2010. So doing increases the value of the EPS ratio. you can control for major fluctuations over time in shares outstanding. Calculating EPS for a company that has issued preferred stock introduces a slight complication. it is necessary to subtract these dividends from net income: EPS (Net Income . the EPS changes are due solely to changes in net income. new products. of course. All Rights Reserved. the number of shares outstanding is constant throughout the year. you might consider investing in a company to obtain a steady return on your investment in the form of regular dividend payments. With both these items. This sort of control is important: it is not unusual for a company to purchase its own stock on the open market to reduce the number of outstanding shares.Profitability Ratios Earnings Per Share (EPS) Ratio Net income Shares of common stock outstanding EPS Quarter 1 $490. because different companies always have different numbers of shares of stock outstanding. higher) rate per share. . It may be a good candidate for horizontal analysis. is that the retention of income to invest in the company will subsequently increase its income. Companies frequently face a choice of distributing income in the form of dividends.879 1. Because the company pays dividends on preferred stock before any distribution to shareholders of common stock. it might not carry voting privileges. and often has a higher priority than common stock as to the distribution of liquidated assets if the company goes out of business. Many companies issue at least two different kinds of stock: common and preferred.000 $491 Quarter 2 $227. if you have access both to information about the company's income and shares outstanding. Its basic formula is: EPS = Income Available for Common Stock / Shares of Common Stock Outstanding EPS is usually a poor candidate for vertical analysis. Because.

Therefore. of course.8% Quarter 2 $1. or retailing company typically has a large cost of goods sold. This added value is. plus associated overhead. this is the value that the company adds to that of the products it obtains from its suppliers. Its formula is: Gross profit margin = (Sales . The gross profit margin measures the amount that customers are willing to pay for a company's product.000 $865. that the company provides. JaxWorks. In turn.Profitability Ratios Gross Profit Margin Sales Cost of sales Gross profit margin Quarter 1 $2.Cost of Goods Sold) / Sales The cost of goods sold is.500.3% Quarter 3 $1. 2010. © Copyright. If customers do not place sufficient value on whatever the company adds to its products. clearly. A service business. there will not be enough gross profit to pay for the associated costs. This margin can depend on the attractiveness of additional services.100 $946. such as a financial services institution or a laundry. with a gross profit margin that varies from 20 percent to 40 percent.000 $945. The gross profit margin depends heavily on the type of business in which a company is engaged.000 42.000 35.616 52. The gross profit margin also depends heavily on the ability of the sales force to persuade its customers of the value added by the company. A manufacturing. such as warranties.9% Gross Profit Margin The gross profit margin is a basic ratio that measures the added value that the market places on a company's non-manufacturing activities. All Rights Reserved.010.300. . over and above the company's cost for that product. typically has little or no cost of goods sold. As mentioned previously. It is usually calculated as the sum of the cost of materials the company purchases plus any labor involved in the manufacture of finished goods.9% Quarter 4 $2. wholesaling. created by other costs such as operating expenses.000 $833. these costs must be met largely by the gross profit on sales.000 52. an important component of the gross profit margin. the calculation of the gross profit margin helps to highlight the effectiveness of the company's sales strategies and sales management.000.

Profitability Ratios Net Profit Margin Net Income Sales Net profit margin Quarter 1 $490. Another place to look when you see a discrepancy between gross profit margin and net profit margin is operating expenses.059 $1.100 41.879 $1. and increasing expenses when necessary to support production and sales in better times. relative to sales. . © Copyright.5% Quarter 2 $227. When the two margins covary closely.000. a principal culprit is cost of sales.1% Quarter 4 $834. JaxWorks.500. 2010. The formula generally used to determine the net profit margin is: Net Profit Margin = Earnings After Taxes / Sales When net profit margin falls dramatically from the first to the fourth quarters.000 15. it suggests that management is doing a good job of reducing expenses when sales fall. but also its ability to keep operating costs down. All Rights Reserved.300.010.000 24.109 $2.000 13.2% Quarter 3 $170. and highlights not just the company's sales efforts.5% Net Profit Margin The net profit margin narrows the focus on profitability.700 $2.

The better the job that management does in managing its assets-the resources available to it-to bring about profits.7% Return on Assets One of management's most important responsibilities is to bring about a profit by effective use of the resources it has at hand. rather than on a quarterly basis. It's normal to calculate the return on total assets on an annual basis.776. There are several ways to measure this return. One ratio that speaks to this question is return on assets.Profitability Ratios Return on Assets EBITDA Total assets Return on assets Full Year $1.Operating Expense) / Total Assets This formula will return the percentage earnings for a company in terms of its total assets. 2010. All Rights Reserved. one useful method is: Return on Assets = (Gross Profit . © Copyright. the greater this percentage will be.368.963 52.743 $3. . JaxWorks.

The principal difference between the formula for return on assets and for return on equity is the use of equity rather than total assets in the denominator.700 24.157 44. JaxWorks.3% Quarter 4 $834. .059 $2.579 10. you can expect that some form of financial leverage makes up the difference: i.Profitability Ratios Return on Equity Earnings after taxes Stockholder's equity Return on equity Quarter 1 $490. you can largely determine how the company is funding its operations.2% Quarter 3 $170. When the value of the company's assets exceeds the value of its equity. Again.879 $2.e. Therefore. © Copyright.. there are several ways to calculate this ratio. 2010. if the Return on Equity ratio is much larger than the Return on Assets ratio.897.226.324. All Rights Reserved. you can infer that the company has funded some portion of its operations through borrowing.0% Quarter 2 $227. Assets are acquired through two major sources: creditors (through borrowing) and stockholders (through retained earnings and capital contributions). the retained earnings and capital contributions constitute the company's equity.538 7.0% Return on Equity Another related profitability measure to Return on Assets is the Return on Equity. it is measured according to this formula: Return on Equity = Net Income / Stockholder's Equity You can compare return on equity with return on assets to infer how a company obtains the funds used to acquire assets. Collectively. By examining the difference between Return on Assets and Return on Equity. here. and it is here that the technique of comparing ratios comes into play.040.700 $2. debt financing.109 $1.

548.305 $757. from the creditor's standpoint.740 2. the nature of the current assets: they consist mainly of cash and cash equivalents. from the standpoint of stockholders and management.433 $605. .271 $385. Working capital is the difference between current assets and current liabilities.358.438.091 $559. All Rights Reserved.2 Quarter 3 $1.887 2. Consider.355 1. Is a high current ratio good or bad? Certainly. The usual formula is: Current Ratio = Current Assets / Current Liabilities The current ratio measures the company's ability to repay the principal amounts of its liabilities. a high current ratio means that the company is well-placed to pay back its loans.5 Current Ratio The current ratio compares a company's current assets (those that can be converted to cash during the current accounting period) to its current liabilities (those liabilities coming due during the same period). © Copyright. Funds invested in these types of assets do not contribute strongly and actively to the creation of income.9 Quarter 2 $1. though. 2010. a current ratio that is very high means that the company's assets are not being used to best advantage.8 Quarter 4 $951. JaxWorks.896 2.Liquidity Ratios Current ratio Current assets Current liabilities Current ratio Quarter 1 $1. Therefore. The current ratio is closely related to the concept of working capital.

433 $590. It is possible for a company to manipulate the values of its current and quick ratios by taking certain actions toward the end of an accounting period such as a fiscal year. But inventory cannot be converted to cash except by selling it.438. In practice. it might choose a fiscal year that ends after its busy season. while it is a current asset. is not as liquid as cash or accounts receivable.305 $630. If your actual costs to purchase materials are falling. if its business is seasonal. a quick ratio of 1. All Rights Reserved. this is because it assumes that the most recently acquired inventory is also the most recently sold. for example. The quick ratio determines the relationship between quickly accessible current assets and current liabilities: Quick Ratio = (Current Assets .186. rather than summing cash and cash equivalents. in particular. Or. . 2010.3 Quarter 3 $1. It takes into account the fact that inventory.002 $385. the LIFO method could result in an over-valuation of the existing inventory. Cash is completely liquid.6 Quick Ratio The quick ratio is a variant of the current ratio.1 Quarter 2 $1.896 1. © Copyright. accounts receivable can normally be converted to cash fairly quickly. but accounts payable are due within 30 days.959 $605. and to underestimate the value of the quick ratio if you calculate it by subtracting inventory from current assets. This would tend to inflate the value of the current ratio.0 is normally considered adequate. Both a current and a quick ratio can also mislead you if the inventory figure does not represent the current replacement cost of the materials in inventory. As a potential creditor.887 1. a quick ratio of 1. you might want to examine the company’s current and quick ratios on. If revenues will stay in accounts receivable for as long as 90 days.358. when inventories are usually low. JaxWorks. There are various methods of valuing inventory.548. can result in an inventory valuation that is much different from the inventory's current replacement value.740 -0. The LIFO method.0 will mean that accounts receivable cannot be converted to cash quickly enough to meet accounts payable. with this caveat: the credit periods that the company offers its customers and those granted to the company by its creditor must be roughly equal.091 $575. for example.271 $1. a quarterly basis.178 $559. for example.411 $757.355 1.7 Quarter 4 $951.Inventory) / Current Liabilities The quick ratio shows whether a company can meet its liabilities from quickly-accessible assets.Liquidity Ratios Quick ratio Current assets Inventory Current liabilities Quick ratio Quarter 1 $1. It might wait until the start of the next period to make purchases to its inventory. by pressing for collection from the customer.

Activity Ratios Average Collection Period Accounts Receivable Credit sales per day Average Collection Period Quarter 1 $657. It may be that collection procedures need to be reviewed. Regardless of the cause. You should interpret the average collection period in terms of the company's credit policies.444 30 Quarter 4 $660. © Copyright.397 $14.855 $22. It is also possible that the qualifying procedures used by the sales force are not stringent enough. the company's policy as stated to its customers is that payment is to be received within two weeks. then an average collection period of 30 days indicates that collections are lagging.667 30 Quarter 3 $427. If. be sure to check whether the sales dates occur evenly throughout the period in question. if the average collection period is over-long. All Rights Reserved.151 $16. for example. . The company is not converting cash due from customers into new assets that can. One formula for this ratio is: Average Collection Period = Accounts Receivable / (Credit Sales / Days) Where Days is the number of days in the period for which Accounts Receivable and Credit Sales accumulate. it means that the company is losing profit. To the degree that the credit sales cluster at the end of the period.534 $22.334 30 Average Collection Period You can obtain a general estimate of the length of time it takes to receive payment for goods or services by calculating the Average Collection Period. the Average Collection Period will return an inflated figure. be used to generate new income. in turn. 2010. JaxWorks. If you obtain a result that appears too long (or too short). The calculation of the Average Collection Period assumes that credit sales are distributed roughly evenly during any given period.222 30 Quarter 2 $493. or it is possible that one particularly large account is responsible for most of the collections in arrears.

nor does it become technologically obsolete more frequently than every few months. The figures for cost of goods sold and average inventory are taken directly from the Income Statement's cost of sales and the Balance Sheet's inventory levels. .5 Quarter 2 $865. for example.000 $630. at the beginning and the ending of a period-you would use the average of the two levels: hence the term "average inventory.616 $1. often incur carrying charges for the storage of the goods.8 Inventory Turnover Ratio No company wants to have too large an inventory (the sales force excepted: salespeople prefer to be able to tell their customers that they can obtain their purchase this afternoon). you would probably require an annual turnover rate in the 50s: a much lower rate would mean that you were losing too much inventory to spoilage. But if you sell computing equipment. All Rights Reserved. of course. the more closely a company conforms to just-in-time procedures.178 1. The higher an inventory turnover rate.000 $590.411 1." An acceptable inventory turnover rate can be determined only by knowledge of a company's business sector. but by calculating the inventory turnover rate you can estimate how well a company is approaching the ideal. you could probably afford an annual turnover rate of around 3 or 4.5 Quarter 3 $833.000 $575. 2010. JaxWorks. If you are in the business of wholesaling fresh produce.4 Quarter 4 $946. an unrealistic ideal. Just-in-Time inventory procedures attempt to ensure that the company obtains its inventory no sooner than absolutely required in order to support its sales efforts. © Copyright. and can become obsolete while awaiting sale.002 0. Goods that remain in inventory too long tie up the company's assets in idle stock. because hardware does not spoil.186. That is.959 1. The formula for the Inventory Turnover Ratio is: Inventory Turnover = Cost of Goods Sold / Average Inventory where the Average Inventory figure refers to the value of the inventory on any given day during the period during which the Cost of Goods Sold is calculated.Activity Ratios Inventory Turnover Ratio Cost of Goods Sold Average Inventory Inventory Turnover Quarter 1 $945. In a situation where you know only the beginning and ending inventory-for example.

897 35. All Rights Reserved.042.464. © Copyright. as soon as possible.887 $3.262.4% Quarter 4 $1.541.2% Quarter 3 $1. although both stockholders and potential creditors would prefer to see the rate of decline in the debt ratio more closely match the decline in return on assets.475 36.896 $3. JaxWorks.Leverage Ratios Debt ratio Total Liabilities Total Assets Debt ratio Quarter 1 $1.8% Quarter 2 $1.055 41. the net income available to make payments on debt also falls.489.939.5% Debt Ratio The debt ratio is defined by this formula: Debt ratio = Total debt / Total assets It is a healthy sign when a company's debt ratio is falls. 2010. . As the return on assets falls.216. and the current portion of its long-term debt.355 $3. This company should probably take action to retire some of its short-term debt.505.740 $2.425 34.

There are certain obvious considerations: for example. you might need to acquire investment capital from many investors. conversely. All Rights Reserved. By law. look at ratios such as the return on assets and the debt ratio. its creditors have the first claim on its assets to help repay the borrowed funds.505.939.2% Quarter 2 $2. 2010. The stockholder's demand for a return can take the form of dividend requirements or return on assets. Therefore. But there is no "always" in financial planning. It is that portion of the company's assets financed by stockholders: Equity Ratio = Total Equity / Total assets It is usually easier to acquire assets through debt than to acquire them through equity. if a firm ceases operations. Less obvious is the issue of priority. it might seem that debt is the preferred method of raising funds to acquire assets. though.475 63. each of which tend to increase the market value of their stock.040. Because investors usually require a higher return on their investment than do creditors. © Copyright.324.055 58.425 65.5% Equity Ratio The equity ratio is the opposite of the debt ratio. and the effect is that stockholders tend to demand a greater return on their investment than a creditor does on its loan.6% Quarter 4 $1. whereas you might be able to borrow the required funds from just one creditor. A high debt ratio (or.8% Quarter 3 $2.541.157 $2.700 $3.897.489. a low equity ratio) means that existing creditors have supplied a large portion of the company's assets. JaxWorks.538 $3.897 64. an investor's risk is somewhat higher than that of a creditor.Leverage Ratios Equity ratio Total Equity Total Assets Equity ratio Quarter 1 $2.226. . Potential creditors. and that there is relatively little stockholder's equity to help absorb the risk.579 $3.

in reality. would mean that the amount of interest payments is earned 5 times over during that period.250 16. JaxWorks.1 would usually be considered strong but within the normal range. Notice that this is a measure of how deeply interest charges cut into a company's income.835 $16.192 $16. for example.3 Times interest Earned Ratio One measure frequently used by creditors to evaluate the risk involved in loaning money to a firm is the Times Interest Earned ratio. © Copyright.1 Quarter 2 $341.250 74. A value of 44.Leverage Ratios Times Interest Earned Ratio EBIT Interest charges Times interest earned Quarter 1 $717. in this case it's likely that there would be no income tax liability). for example. There would be no income remaining to pay income taxes (of course. to meet dividend requirements or to retain earnings for future investments. 2010.0 Quarter 3 $259.250 21. This is the number of times in a given period that a company earns enough income to cover its interest payments.250 $16.792 $16. A value of 5.250 44. The usual formula is: Times Interest Earned = *EBIT / Total Interest Payments *EBIT stands for Earnings Before Interest and Taxes. although certainly not unheard of during a particularly good quarter.0 Quarter 4 $1. A ratio of 5.1 is very high. The Times Interest Earned ratio. would mean that the company earns enough income (after covering such costs as operating expenses and costs of sales) to cover only its interest charges. A ratio of 1. . All Rights Reserved. seldom exceeds 10.207.