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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. . All Rights Reserved.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. Jaxworks.

The "Index Worksheet" is your transportation page. All pages are setup to print. Look for the red corner triangles for additional instructions on the worksheets. For example:>>>> Printing: 1. JaxWorks. Be sure to "Print Preview" before printing a page.Instructions Please Read This Page Carefully Data Entry The "Income Statement" and "Balance Sheet" are your two data entry worksheets. . All Rights Reserved. Point Here © Copyright. 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". Additional Instructions: 1. 2. All pages have a return button to it. Navigation: 1.

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

722.942 $426.700 $518.648.600 $16.000 © Copyright.000 $581.000 $1.748 $320.616 $1.000 $134.810.000 $16.000 $10. All Rights Reserved.115 $1.250 $32.663 $227.616 $2.700 Income before tax Please enter a tax percentage Taxes @ 30% Net income Detailed Supporting Information Cost of sales Direct labor Materials Other costs $701.250 $33.000 $16.484 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 $2.572.000 $945.000 $635.958 $1.250 $33.000 $100.700 $200.000 $125.000 $500.542 $275.000 $125.220.883 $170.000 $605.069 $738.000 $208. .585 $357.010.000 $3.000 $240.374 $5.000 $125.879 $242.000 $500.000 $500.000 $20.321 $1.500.000 $405.000 Total 1999 $6.000 $120.109 $2.000 $50.000 $1.500 $1.000 $500.300 $490.100 $3.055.250 $327.589.958 $1.000 $318. State ZIP Code Phone Number fax Fax Number ANNUAL INCOME STATEMENT Forecasted 2ND QTR 3RD QTR $1. JaxWorks. 2010.942 $72.000 $1.300.616 $500.741 $65.250 $369.000 $865.000 4TH QTR $2.000 $103.000 $467.443.000 $60.958 $1.700 $325.000 $1.000 $125.616 $3.100 $946.458 $265.461.250 $477.000.700 $370.599 $585.000 $833.484 $424.000 $321.542 $97.089.000.000 $210.063.885 $1.250 $33.191.059 $1.000 $888.475 $834.058 $139.141 $16.369 $100.250 $474.COMPANY NAME Company Address City.

000 $400.186.767 $50.000 $100.000.374 $1.000 $100.000 $90.000 $757.157 $2.178 $76.000 $1.767 $50.500 $120.000 $875.400.000 $1.000 $1.000 $100.887 1.940.216.000 $90.000 $1.137 $12.000 $100.320 $1.500 $27.767 $50.000 $875.740 $600.000 $1. .000 $20.890.000 $100.000 $21.538 $2.750 $33.090 $1.450.708 $12.767 $50.000 $500. All Rights Reserved.000 $2.000 $1.466 $12.000 $100.887 $328.000 $23.233 $493.000 $22.000 $50.548.397 $575.450.000 $25.151 $590. 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 $451.355 $328.000 $112.000 $875.000 $50.542 $137.000 $14.084 $150.700 $2.000 $52.000 $328.000 $27.300 $83.716.000 $100.896 $328.042.663 $62.550.747.000 $400.464.450.000 $183.983 $54.000 $605.750 $26.000 $534.000 $2.000 $27.000 $1.000 $27. 2010.211.740 1.000 $936.226.000 $90.000 $1.500 $1.000 $50.000 $23.437.000 $40.250 $28.250 $5.055 $500.475 $50.358.579 $3.000 $2.000 $1.305 $229.450.000 Actual 1999 $50.040.896 1.400.000 $2.000 $16.579 $2.000 $3.538 $3.000 $30.425 $50.355 1.COMPANY NAME Company Address City.000 $90.462.196 $427.000 $1.450.433 $469.000 $30.586) $660.475. JaxWorks.000 $100.000 $350.500 $432.000 ($188.735) $83.000 $40.000 $1.425 $500.700 $3.360 $657.489.505.000 $559.000 $40.266.271 $100.983.000 $3.000 $100.266.000 $90.288 $12.000 $3.000 $875.000 $2.000 $3.157 $1.000 $2.541.174.000 $50.000 1.000 $100.324.855 $1.000 $466.000 $90.000 $951.000 $100.438.534 $630.000 $2.000 $90.000 $2.262.000 $50.000 $50.458 $1.500.000 $3.002 $50.000 $800.475 $500.000 $25.939.416 $1.000 $27.055 $50.897 Total Liabilities and Equity © Copyright.541.000 $30.959 $45.489.000 $10.091 ($945.000 $385.000 $125.500 $2.505.076.000 $1.000 $25.939.000 $1.962.897 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 $600.500 $500.000 $2.500 $1.000 $1.411 $60.005.897.000 $100.626 $50.

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

Cost of Goods Sold) / Sales The cost of goods sold is. This added value is. these costs must be met largely by the gross profit on sales.300.9% 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.000 $865.9% Quarter 4 $2.000. . plus associated overhead. created by other costs such as operating expenses. with a gross profit margin that varies from 20 percent to 40 percent. there will not be enough gross profit to pay for the associated costs.000 35. 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 . A manufacturing. 2010.100 $946. The gross profit margin depends heavily on the type of business in which a company is engaged. over and above the company's cost for that product. or retailing company typically has a large cost of goods sold.000 $833. 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. of course. the calculation of the gross profit margin helps to highlight the effectiveness of the company's sales strategies and sales management. The gross profit margin measures the amount that customers are willing to pay for a company's product. This margin can depend on the attractiveness of additional services. All Rights Reserved.500. JaxWorks. As mentioned previously.000 52.Profitability Ratios Gross Profit Margin Sales Cost of sales Gross profit margin Quarter 1 $2. clearly.010. that the company provides. In turn. an important component of the gross profit margin.616 52.3% Quarter 3 $1.000 $945. A service business. Therefore. If customers do not place sufficient value on whatever the company adds to its products. such as a financial services institution or a laundry.8% Quarter 2 $1. © Copyright. such as warranties. typically has little or no cost of goods sold. 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.000 42. wholesaling.

and increasing expenses when necessary to support production and sales in better times.109 $2. When the two margins covary closely. Another place to look when you see a discrepancy between gross profit margin and net profit margin is operating expenses.500.5% Net Profit Margin The net profit margin narrows the focus on profitability.000.000 24. it suggests that management is doing a good job of reducing expenses when sales fall.700 $2.5% Quarter 2 $227.Profitability Ratios Net Profit Margin Net Income Sales Net profit margin Quarter 1 $490. . All Rights Reserved. © Copyright.300. but also its ability to keep operating costs down.000 13. and highlights not just the company's sales efforts. JaxWorks. 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.059 $1. 2010.1% Quarter 4 $834.000 15.879 $1.010.2% Quarter 3 $170. a principal culprit is cost of sales.100 41. relative to sales.

© Copyright. One ratio that speaks to this question is return on assets. The better the job that management does in managing its assets-the resources available to it-to bring about profits. one useful method is: Return on Assets = (Gross Profit . the greater this percentage will be.368. It's normal to calculate the return on total assets on an annual basis. .Profitability Ratios Return on Assets EBITDA Total assets Return on assets Full Year $1. 2010.Operating Expense) / Total Assets This formula will return the percentage earnings for a company in terms of its total assets. rather than on a quarterly basis. All Rights Reserved.776.743 $3.7% 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.963 52. JaxWorks. There are several ways to measure this return.

.109 $1.e. JaxWorks. the retained earnings and capital contributions constitute the company's equity.040.157 44. if the Return on Equity ratio is much larger than the Return on Assets ratio. All Rights Reserved. Collectively. you can expect that some form of financial leverage makes up the difference: i.0% Return on Equity Another related profitability measure to Return on Assets is the Return on Equity.538 7.700 24. here. 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.0% Quarter 2 $227. 2010. . © Copyright.226.324.Profitability Ratios Return on Equity Earnings after taxes Stockholder's equity Return on equity Quarter 1 $490. you can infer that the company has funded some portion of its operations through borrowing. 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.879 $2. Assets are acquired through two major sources: creditors (through borrowing) and stockholders (through retained earnings and capital contributions).700 $2. When the value of the company's assets exceeds the value of its equity. and it is here that the technique of comparing ratios comes into play. debt financing. By examining the difference between Return on Assets and Return on Equity.897. Therefore.579 10. Again. there are several ways to calculate this ratio.2% Quarter 3 $170. you can largely determine how the company is funding its operations.059 $2.3% Quarter 4 $834.

9 Quarter 2 $1. Consider.896 2. Is a high current ratio good or bad? Certainly. Therefore.271 $385. © Copyright. JaxWorks. Funds invested in these types of assets do not contribute strongly and actively to the creation of income. from the creditor's standpoint.438.740 2. Working capital is the difference between current assets and current liabilities. from the standpoint of stockholders and management.548.2 Quarter 3 $1. 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 current ratio that is very high means that the company's assets are not being used to best advantage. 2010.Liquidity Ratios Current ratio Current assets Current liabilities Current ratio Quarter 1 $1.433 $605.8 Quarter 4 $951.355 1.358. . All Rights Reserved. The current ratio is closely related to the concept of working capital. a high current ratio means that the company is well-placed to pay back its loans.887 2.5 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).091 $559. the nature of the current assets: they consist mainly of cash and cash equivalents. though.305 $757.

when inventories are usually low.Inventory) / Current Liabilities The quick ratio shows whether a company can meet its liabilities from quickly-accessible assets. can result in an inventory valuation that is much different from the inventory's current replacement value.433 $590.548. for example.091 $575.271 $1. It takes into account the fact that inventory.887 1. a quick ratio of 1.411 $757. But inventory cannot be converted to cash except by selling it. 2010. All Rights Reserved. for example.740 -0.7 Quarter 4 $951. 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. for example.355 1. If your actual costs to purchase materials are falling. but accounts payable are due within 30 days. If revenues will stay in accounts receivable for as long as 90 days. In practice.305 $630. The quick ratio determines the relationship between quickly accessible current assets and current liabilities: Quick Ratio = (Current Assets .1 Quarter 2 $1. if its business is seasonal. is not as liquid as cash or accounts receivable. © Copyright. and to underestimate the value of the quick ratio if you calculate it by subtracting inventory from current assets.186. the LIFO method could result in an over-valuation of the existing inventory. a quarterly basis. 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. by pressing for collection from the customer.002 $385.0 is normally considered adequate. while it is a current asset. .896 1.0 will mean that accounts receivable cannot be converted to cash quickly enough to meet accounts payable. a quick ratio of 1. you might want to examine the company’s current and quick ratios on.959 $605. This would tend to inflate the value of the current ratio.6 Quick Ratio The quick ratio is a variant of the current ratio. in particular. Or. There are various methods of valuing inventory.178 $559. this is because it assumes that the most recently acquired inventory is also the most recently sold.3 Quarter 3 $1. The LIFO method.358. it might choose a fiscal year that ends after its busy season. JaxWorks.Liquidity Ratios Quick ratio Current assets Inventory Current liabilities Quick ratio Quarter 1 $1. 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. rather than summing cash and cash equivalents.438. It might wait until the start of the next period to make purchases to its inventory. accounts receivable can normally be converted to cash fairly quickly. As a potential creditor. Cash is completely liquid.

2010. if the average collection period is over-long. All Rights Reserved. Regardless of the cause. If. for example.534 $22. . To the degree that the credit sales cluster at the end of the period. 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. JaxWorks.444 30 Quarter 4 $660.151 $16. The calculation of the Average Collection Period assumes that credit sales are distributed roughly evenly during any given period. or it is possible that one particularly large account is responsible for most of the collections in arrears. 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. be sure to check whether the sales dates occur evenly throughout the period in question. be used to generate new income. The company is not converting cash due from customers into new assets that can. You should interpret the average collection period in terms of the company's credit policies. If you obtain a result that appears too long (or too short). © Copyright. It may be that collection procedures need to be reviewed.Activity Ratios Average Collection Period Accounts Receivable Credit sales per day Average Collection Period Quarter 1 $657.397 $14.334 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. it means that the company is losing profit. the Average Collection Period will return an inflated figure. It is also possible that the qualifying procedures used by the sales force are not stringent enough.222 30 Quarter 2 $493. in turn.855 $22.

often incur carrying charges for the storage of the goods. © Copyright.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). But if you sell computing equipment.411 1. the more closely a company conforms to just-in-time procedures. 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. and can become obsolete while awaiting sale.Activity Ratios Inventory Turnover Ratio Cost of Goods Sold Average Inventory Inventory Turnover Quarter 1 $945.959 1. for example.000 $590. JaxWorks.000 $630. 2010.5 Quarter 3 $833.186.5 Quarter 2 $865. . 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.4 Quarter 4 $946.000 $575. Goods that remain in inventory too long tie up the company's assets in idle stock. If you are in the business of wholesaling fresh produce.178 1.002 0. The higher an inventory turnover rate. at the beginning and the ending of a period-you would use the average of the two levels: hence the term "average inventory. because hardware does not spoil. but by calculating the inventory turnover rate you can estimate how well a company is approaching the 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. an unrealistic ideal. All Rights Reserved. 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. you could probably afford an annual turnover rate of around 3 or 4." An acceptable inventory turnover rate can be determined only by knowledge of a company's business sector.616 $1. of course. That is. nor does it become technologically obsolete more frequently than every few months. In a situation where you know only the beginning and ending inventory-for example.

4% Quarter 4 $1.896 $3. 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.505.887 $3.939. 2010. the net income available to make payments on debt also falls.Leverage Ratios Debt ratio Total Liabilities Total Assets Debt ratio Quarter 1 $1.2% Quarter 3 $1.216.489.425 34.897 35.8% Quarter 2 $1.055 41. .740 $2. This company should probably take action to retire some of its short-term debt. As the return on assets falls.042. as soon as possible.262.355 $3. © Copyright. All Rights Reserved. JaxWorks.475 36.5% 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.541.464. and the current portion of its long-term debt.

a low equity ratio) means that existing creditors have supplied a large portion of the company's assets.939. The stockholder's demand for a return can take the form of dividend requirements or return on assets. Because investors usually require a higher return on their investment than do creditors. © Copyright.6% Quarter 4 $1. A high debt ratio (or.897 64. But there is no "always" in financial planning.5% Equity Ratio The equity ratio is the opposite of the debt ratio. its creditors have the first claim on its assets to help repay the borrowed funds. look at ratios such as the return on assets and the debt ratio.8% Quarter 3 $2. it might seem that debt is the preferred method of raising funds to acquire assets. an investor's risk is somewhat higher than that of a creditor. Less obvious is the issue of priority. whereas you might be able to borrow the required funds from just one creditor.541.040.226.324. each of which tend to increase the market value of their stock.579 $3. JaxWorks. By law. though.700 $3. There are certain obvious considerations: for example. if a firm ceases operations. and the effect is that stockholders tend to demand a greater return on their investment than a creditor does on its loan.505.538 $3. . and that there is relatively little stockholder's equity to help absorb the risk. 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.157 $2.055 58. All Rights Reserved. you might need to acquire investment capital from many investors. 2010.489. Potential creditors.897. conversely.Leverage Ratios Equity ratio Total Equity Total Assets Equity ratio Quarter 1 $2.2% Quarter 2 $2.475 63.425 65. Therefore.

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. would mean that the amount of interest payments is earned 5 times over during that period. Notice that this is a measure of how deeply interest charges cut into a company's income. for example. All Rights Reserved.207. A value of 5.250 44. 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. This is the number of times in a given period that a company earns enough income to cover its interest payments.192 $16. A ratio of 1.250 21.1 Quarter 2 $341.1 is very high.0 Quarter 4 $1. JaxWorks. although certainly not unheard of during a particularly good quarter. A value of 44. seldom exceeds 10. The Times Interest Earned ratio. The usual formula is: Times Interest Earned = *EBIT / Total Interest Payments *EBIT stands for Earnings Before Interest and Taxes. © Copyright. in this case it's likely that there would be no income tax liability).1 would usually be considered strong but within the normal range.835 $16. 2010.250 16.250 $16. There would be no income remaining to pay income taxes (of course.250 74. for example. .Leverage Ratios Times Interest Earned Ratio EBIT Interest charges Times interest earned Quarter 1 $717. A ratio of 5.0 Quarter 3 $259. to meet dividend requirements or to retain earnings for future investments.792 $16. in reality.

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