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Financial ratio

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Working capital management Cash conversion cycle Return on capital Economic value added Just In Time Economic order quantity Discounts and allowances Factoring (finance) Capital budgeting Capital investment decisions The investment decision The financing decision Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business plan Corporate action Finance series Financial market Financial market participants Corporate finance Personal finance Public finance

but may be more understandable: for instance. Ratios may be expressed as a decimal value. while the P/E ratio cannot be: for example.10. there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. a P/E ratio of 20 corresponds to an earnings yield of 5%. Some ratios are usually quoted as percentages. the earnings yield can be compared with bond yields. such as 10%. the market price of the shares is used in certain financial ratios. The reciprocal expresses the same information. . and conversely. especially ratios that are usually or always less than 1. Given any ratio. by current and potential shareholders (owners) of a firm. such as earnings yield. such as 0.[1] If shares in a company are traded in a financial market. especially ratios that are usually more than 1. while others are usually quoted as decimal numbers.Banks and Banking Financial regulation This box: view • talk • edit Accountancy Key concepts Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS Fields of accounting Cost · Financial · Forensic · Fund · Management · Tax Financial statements Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings Auditing Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act Professional Accountants CPA · Chartered Accountant This box: view • talk • edit A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. or given as an equivalent percent value. Often used in accounting. and by a firm's creditors. these latter are also called multiples. the reciprocal will be below 1. one can take its reciprocal. if the ratio was above 1. Financial ratios may be used by managers within a firm. such as P/E ratio. Security analysts use financial ratios to compare the strengths and weaknesses in various companies.

1 Other abbreviations 5 Ratios o 5. income statement. Liquidity ratios measure the availability of cash to pay debt.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.1 Profitability ratios 6 Liquidity ratios 7 Activity ratios (Efficiency Ratios) 8 Debt ratios (leveraging ratios) 9 Market ratios 10 Capital Budgeting Ratios 11 See also 12 External links 13 References [edit] Sources of data for financial ratios Values used in calculating financial ratios are taken from the balance sheet. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. [edit] Purpose and types of ratios Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. statement of cash flows or (sometimes) the statement of retained earnings.[6] Financial ratios allow for comparisons • • • • between companies between industries between different time periods for one company between a single company and its industry average .Contents [hide] • • • • • • • • • • • • • 1 Sources of data for financial ratios 2 Purpose and types of ratios 3 Accounting methods and principles 4 Abbreviations and terminology o 4. [5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. These comprise the firm's "accounting statements" or financial statements. The statements' data is based on the accounting method and accounting standards used by the organization.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.

These companies tend to report "revenue" based on the monetary value of income that the services provide. Net income is always the amount after taxes. or cost of sales. which face different risks. Companies that are primarily involved in providing services with labour do not generally report "Sales" based on hours. amortization. EBIT = Earnings before interest and taxes EBITDA = Earnings before interest. Most public companies are required by law to use generally accepted accounting principles for their home countries. and the terminology is not always consistent between companies. Owner's Equity represents the total number of shares that an individual shareholder owns (usually the owner with controlling interest). like past performance or another company. and early payment discounts from the charge on an invoice. [edit] Abbreviations and terminology Various abbreviations may be used in financial statements. countries and time periods.)'Bold text' • • • • COGS = Cost of goods sold. multiplied by each share's book value. but values in currency. partnerships and sole proprietorships may not use accrual basis accounting. which deduct returns. industries. [edit] Accounting methods and principles Financial ratios may not be directly comparable between companies that use different accounting methods or follow various standard accounting practices. or EBITDA (see below). the ratios of firms in different industries. especially financial statements summarized on the Internet. There is no international standard for calculating the summary data presented in all financial statements.Ratios generally hold no meaning unless they are benchmarked against something else. taxes. capital requirements. and interest. or they may use the generally accepted accounting principles of their home country. but private companies. Shareholder's Equity represents the total number of shares in the company multiplied by each share's book value. depreciation. [edit] Other abbreviations (Note: These are not ratios. unless otherwise stated. It is important to make this distinction when calculating ratios. Large multi-national corporations may use International Financial Reporting Standards to produce their financial statements. and amortization EPS = Earnings per share [edit] Ratios . Thus. and competition are usually hard to compare. the amount would be EBIT. allowances. Note that Shareholder's Equity and Owner's Equity are not the same thing. Otherwise. depreciation. Sales reported by a firm are usually net sales.

Gross profit margin or Gross Profit Rate[7][8] OR Operating margin. net margin or net profit margin[13] [14] Return on equity (ROE) [14] . but it is also sometimes used as a synonym for EBIT and operating profit. Operating Income Margin. (Earnings before interest and taxes / Sales[11][12]) Profit margin. Return on assets (ROA)[15] Return on assets Du Pont (ROA Du Pont)[16] Return on Equity Du Pont (ROE Du Pont) Return on net assets (RONA) . Operating profit margin or Return on sales (ROS)[9][8] Note: Operating income is the difference between operating revenues and operating expenses.[edit] Profitability ratios Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. Gross margin.[10] This is true if the firm has no non-operating income.

Current ratio[18] Acid-test ratio (Quick ratio)[18] .Return on capital (ROC) Risk adjusted return on capital (RAROC) OR Return on capital employed (ROCE) Note: this is somewhat similar to (ROI). which calculates Net Income per Owner's Equity Cash flow return on investment (CFROI) Efficiency ratio Net gearing Basic Earnings Power Ratio[17] [edit] Liquidity ratios Liquidity ratios measure the availability of cash to pay debt.

Average collection period[3] Degree of Operating Leverage (DOL) DSO Ratio[19] Average payment period[3] Asset turnover[20] Stock turnover ratio[21][22] Receivables Turnover Ratio[23] Inventory conversion ratio[4] Inventory conversion period .Operation cash flow ratio [edit] Activity ratios (Efficiency Ratios) Activity ratios measure the effectiveness of the firms use of resources.

Receivables conversion period Payables conversion period Cash Conversion Cycle Inventory Conversion Period + Receivables Conversion Period .Payables Conversion Period [edit] Debt ratios (leveraging ratios) Debt ratios measure the firm's ability to repay long-term debt. . Debt ratio[24] Debt to equity ratio[25] Long-term Debt to equity (LT Debt to Equity)[25] Times interest-earned ratio / Interest Coverage Ratio[25] OR Debt service coverage ratio [edit] Market ratios Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. Debt ratios measure financial leverage.

Earnings per share (EPS)[26] Payout ratio[26][27] OR Dividend cover (the inverse of Payout Ratio) P/E ratio Dividend yield Cash flow ratio or Price/cash flow ratio[28] Price to book value ratio (P/B or PBV)[28] Price/sales ratio PEG ratio Other Market Ratios EV/EBITDA .

^ Groppelli. Inc. p. 4. Many formal methods are used in capital budgeting. 434. p. . 2.. ^ Groppelli. 433. 439. Barron's Educational Series. Finance. 4th ed. 3..EV/Sales Cost/Income ratio Sector-specific ratios EV/capacity EV/output [edit] Capital Budgeting Ratios Main article: Capital budgeting In addition to assisting management and owners in diagnosing the financial health of their company. ^ a b c Groppelli. p. ISBN 0764112759. Ehsan Nikbakht (2000). pp. ^ a b Groppelli. such as acquisitions. Angelico A. or expansion. ratios can also help managers make decisions about investments or projects that the company is considering to take. 436. including the techniques such as • • • • • Net present value Profitability index Internal rate of return Modified Internal Rate of Return Equivalent annuity [edit] See also • • • List of valuation topics Greeks (finance) Capital budgeting [edit] External links • • • Stock Valuation Metrics A Review of Financial Ratio Analysis On the Classification of Financial Ratios [edit] References 1.

265. pp.. ISBN 0030307333. ^ Groppelli. p. "Ratios of Asset Management Study Sheet" CollegeCram. ^ Professor Cram. p. ^ Weston. 14 May 2008 <http://www. 13. 7.5. Brisbane. "Ratios of Profitability: Return on Assets Du Pont" College-Cram. ^ Groppelli. 441. p.collegecram. 23. ^ Groppelli. ^ http://www. ^ Williams. 25. J. E. Carcello (2008). J. ^ Williams. J. Inc. 640. 446. Zane.college-cram. ^ Weygandt. 8.com/3460/operating_income. ^ a b Williams. W. 19. Accounting Principles (4th ed.com. ^ Bodie. McGraw-Hill Irwin. 459. G. p. p. Williams. 801-802. J. Mark S. Marcus (2004). New York. (1990). ISBN 0072510773. p. Essentials of Managerial Finance. ^ Professor Cram. & Kell.com/study/finance/presentations/275> 20. (1996). p.html Operating income definition 11. p. Toronto.. ^ Professor Cram.). 440. ^ Bodie. p. 443. G. 447. Singapore: John Wiley & Sons. 445. p.com.collegecram. Accounting Principles (4th ed. D. Hinsdale: Dryden Press. Chichester. Chichester. 438. 24.. ^ Professor Cram.com/study/finance/presentations/112> 17. 442. 22. Singapore: John Wiley & Sons. ^ a b Groppelli. E. ^ a b Groppelli. Bettner. 10. 14 May 2008 <http://www. McGraw-Hill Irwin.). Kieso. J. 14 May 2008 <http://www. Joseph V. 27. p.. Alex Kane and Alan J. 6.collegecram. Essentials of Investments. pp. 18. 444.com. 14 May 2008 <http://www. p. 435. D. ^ Groppelli. (1996).. p. 26. P. 449. ^ Weygandt.com/study/finance/presentations/104> 14. p. Brisbane. 12. [hide] v•d•e Stock market Types of stocks Stock · Common stock · Preferred stock · Outstanding stock · Treasury stock · Authorised stock · Restricted stock · Concentrated stock · Golden share ParticipantsInvestor · Stock trader/investor · Market maker · Floor trader · Floor broker · . ^ a b c Groppelli. p. "Ratios of Profitability: Profit Margin" College-Cram.com/study/finance/presentations/107> 16.com.investorwords. 295. New York. 28. Susan F. ^ a b Groppelli. 9. ^ Groppelli. & Kell. ^ a b Groppelli. p. p. Inc. "Ratios of Profitability: Return on Assets" CollegeCram. ISBN 9780072996500. ^ a b Groppelli. Financial & Managerial Accounting. 5th ed. 15. W. 21. 459. Haka. 266. 1094. Jan R. Toronto. Kieso. 800.

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