FINANCIAL RATIOS

I.​ LIQUIDITY RATIOS ​provide information about the firm’s ability to pay current obligations and continue operations.

LIQUIDITY RATIO FORMULA DEFINITION EXPRESSED AS:

Round off to two
This describes the amount of capital used to run
Working Capital Current Assets – Current Liabilities decimal places.
day-to-day business operations.
(e.g., 1.23)
Round off to two
Current Ratio Current Assets / Current Liabilities This is used to evaluate the company’s liquidity. decimal places.
(e.g., 1.23)
Quick Assets / Current Liabilities
Round off to two
Quick Ratio (Acid Test This does not consider all the current assets, only those
decimal places.
Ratio) *Quick Assets = Cash + Cash Equivalents + that are easier to liquidate.
(e.g., 1.23)
Net Receivables + Marketable Securities

II. ​LEVERAGE RATIOS​ measure the company’s use of debt to finance assets and operations.

LEVERAGE RATIO FORMULA DEFINITION EXPRESSED AS:

Round off to two
Financial Leverage This indicates the amount of total assets financed by
Total Assets / Total Equity decimal places.
(Equity Multiplier) equity.
(e.g., 1.23)
Percent (%). Round off
This indicates the company’s reliance to debt or liability as
Debt to Equity Ratio Total Debt / Total Equity to two decimal places
a source of financing relative to equity.
(e.g., 45.67%)
Percent (%). Round off
This indicates the percentage of the company’s assets that
Debt Ratio Total Debt / Total Assets to two decimal places
are financed by debt.
(e.g., 45.67%)
Percent (%). Round off
This indicates the percentage of the company’s assets that
Equity Ratio Total Equity / Total Assets to two decimal places
are financed by capital.
(e.g., 45.67%)

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 FINANCIAL RATIOS

Round off to two

Times-Interest Earned Earnings before Interest and Taxes (EBIT) / This indicates the margin of safety for payment of fixed
decimal places.
(TIE) Ratio Interest Expense interest charges.
(e.g., 1.23)

III. ASSET MANAGEMENT RATIOS​ measure the ability of the company to utilize its assets.

ASSET MANAGEMENT
FORMULA DEFINITION EXPRESSED AS:
RATIO
Cost of Goods Sold / Average Inventory
This indicates if a firm holds excessive stocks of Round off to two
Inventory Turnover
inventories that are unproductive and that lessen the decimal places.
Ratio *Average Inventory = (Inventory Beginning +
company’s profitability. (e.g., 1.23)
Inventory End) / 2
365 / Inventory Turnover Ratio
or
Round off to two
Average Age of Average Inventory / Average Daily Cost of This measures the average number of days that inventory
decimal places.
Inventory Goods Sold is held before sale.
(e.g., 1.23)
Note: 366 if leap year
Net Credit Sales / Average Accounts
Receivable Round off to two
Receivables Turnover This measures the entity’s ability to collect from credit
decimal places.
Ratio customers.
*Average Accounts Receivable (AR) = (e.g., 1.23)
(AR Beginning + AR End) / 2
365 / Receivables Turnover Ratio
or
Round off to two
Average Age of Average Accounts Receivable / Average Daily This measures the average number of days to collect a
decimal places.
Receivables Credit Sales receivable.
(e.g., 1.23)
Note: 366 if leap year
Net Credit Purchases excluding Freight - in / This measures the entity’s ability to pay off a payable to Round off to two
Payables Turnover Ratio
Average Accounts Payable suppliers. decimal places.

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 FINANCIAL RATIOS

(e.g., 1.23)
*Average Accounts Payable (AP) =
(AP Beginning + AP End) / 2

365 / Payables Turnover Ratio

or
Round off to two
Average Age of Average AP / Average Net Credit Purchases This measures the average number of days to pay-off a
decimal places.
Accounts Payable excluding Freight - in payable to the supplier.
(e.g., 1.23)
Note: 366 if leap year
Round off to two
Operating Cycle Average Age of Inventories + Average Age of This measures the average number of days to convert
decimal places.
(Conversion Cycle) Receivables inventories into cash.
(e.g., 1.23)
Average Age of Inventories + Average Age of This expresses the length of time in days that it takes for a Round off to two
Cash Conversion Cycle
Receivables - Average Age of Accounts company to convert its investments in inventory and other decimal places.
(CCC)
Payable resources into cash flows from sales. (e.g., 1.23)
Net Sales / Average Net Fixed Assets
Round off to two
Fixed Assets Turnover This measures the level of use of property, plant, and
decimal places.
Ratio *Average Net Fixed Assets (FA) = equipment.
(e.g., 1.23)
(FA Beginning + FA End) / 2
Net Sales / Average Total Assets
Round off to two
Total Assets Turnover This measures the level capital investment relative to sales
decimal places.
Ratio *Average Total Assets (TA) = volume.
(e.g., 1.23)
(TA Beginning + TA End) / 2

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IV. ​PROFITABILITY RATIOS​ measure the ability of the company to generate income from the use of its assets and invested capital as well as control its cost.

PROFITABILITY RATIO FORMULA DEFINITION EXPRESSED AS:

Percent (%). Round off
This reports the peso value of the gross profit earned for
Gross Profit Rate Gross Profit / Net Sales to two decimal places
every peso of sales.
(e.g., 45.67%)
Percent (%). Round off
Profit Margin (Net Profit This relates the peso value of the net income earned to
Net Income / Net Sales to two decimal places
Rate) every peso of sales.
(e.g., 45.67%)
Net Income / Average Total Assets
Percent (%). Round off
Return on Assets This measures the peso value of income generated by
to two decimal places
(Return on Investment) *Average Total Assets (TA) = employing the company’s assets.
(e.g., 45.67%)
(TA Beginning + TA End) / 2
Net Income / Average Equity
Percent (%). Round off
This measures the net income generated by the owner’s
Return on Equity to two decimal places
*Average Equity = capital invested in the business.
(e.g., 45.67%)
(Equity Beginning + Equity End) / 2
EBIT / Average Total Assets
Percent (%). Round off
This calculates the earning power of a business before the
Basic Earning Power to two decimal places
*Average Total Assets (TA) = effect of income taxes and its financial leverage.
(e.g., 45.67%)
(TA Beginning + TA End) / 2

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