List of Financial Ratios

Here is a list of various financial ratios. Take note that most of the ratios can also be expressed
in percentage by multiplying the decimal number by 100%. Each ratio is briefly described.
Profitability Ratios
1. Gross Profit Rate = Gross Profit / Net Sales
Evaluates how much gross profit is generated from sales. Gross profit is equal to net sales (sales minus
sales returns, discounts, and allowances) minus cost of sales.
2. Return on Sales = Net Income / Net Sales
Also known as "net profit margin" or "net profit rate", it measures the percentage of income derived from
dollar sales. Generally, the higher the ROS the better.
3. Return on Assets = Net Income / Average Total Assets
In financial analysis, it is the measure of the return on investment. ROA is used in evaluating
management's efficiency in using assets to generate income.
4. Return on Stockholders' Equity = Net Income / Average Stockholders' Equity
Measures the percentage of income derived for every dollar of owners' equity.
Liquidity Ratios
1. Current Ratio = Current Assets / Current Liabilities
Evaluates the ability of a company to pay short-term obligations using current assets (cash, marketable
securities, current receivables, inventory, and prepayments).
2. Acid Test Ratio = Quick Assets / Current Liabilities
Also known as "quick ratio", it measures the ability of a company to pay short-term obligations using the
more liquid types of current assets or "quick assets" (cash, marketable securities, and current
receivables).
3. Cash Ratio = ( Cash + Marketable Securities ) / Current Liabilities
Measures the ability of a company to pay its current liabilities using cash and marketable securities.
Marketable securities are short-term debt instruments that are as good as cash.
4. Net Working Capital = Current Assets - Current Liabilities
Determines if a company can meet its current obligations with its current assets; and how much excess or
deficiency there is.
Management Efficiency Ratios
1. Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Measures the efficiency of extending credit and collecting the same. It indicates the average number of
times in a year a company collects its open accounts. A high ratio implies efficient credit and collection
process.
2. Days Sales Outstanding = 360 Days / Receivable Turnover
Also known as "receivable turnover in days", "collection period". It measures the average number of days
it takes a company to collect a receivable. The shorter the DSO, the better. Take note that some use 365
days instead of 360.
3. Inventory Turnover = Cost of Sales / Average Inventory
 Represents the number of times inventory is sold and replaced. Take note that some authors use Sales in
lieu of Cost of Sales in the above formula. A high ratio indicates that the company is efficient in managing
its inventories.
4. Days Inventory Outstanding = 360 Days / Inventory Turnover
Also known as "inventory turnover in days". It represents the number of days inventory sits in the
warehouse. In other words, it measures the number of days from purchase of inventory to the sale of the
same. Like DSO, the shorter the DIO the better.
5. Accounts Payable Turnover = Net Credit Purchases / Ave. Accounts Payable
Represents the number of times a company pays its accounts payable during a period. A low ratio is
favored because it is better to delay payments as much as possible so that the money can be used for
more productive purposes.
6. Days Payable Outstanding = 360 Days / Accounts Payable Turnover
Also known as "accounts payable turnover in days", "payment period". It measures the average number
of days spent before paying obligations to suppliers. Unlike DSO and DIO, the longer the DPO the better
(as explained above).
7. Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding
Measures the number of days a company makes 1 complete operating cycle, i.e. purchase merchandise,
sell them, and collect the amount due. A shorter operating cycle means that the company generates sales
and collects cash faster.
8. Cash Conversion Cycle = Operating Cycle - Days Payable Outstanding
CCC measures how fast a company converts cash into more cash. It represents the number of days a
company pays for purchases, sells them, and collects the amount due. Generally, like operating cycle, the
shorter the CCC the better.
9. Total Asset Turnover = Net Sales / Average Total Assets
Measures overall efficiency of a company in generating sales using its assets. The formula is similar to
ROA, except that net sales is used instead of net income.
Leverage Ratios
1. Debt Ratio = Total Liabilities / Total Assets
Measures the portion of company assets that is financed by debt (obligations to third parties). Debt ratio
can also be computed using the formula: 1 minus Equity Ratio.
2. Equity Ratio = Total Equity / Total Assets
Determines the portion of total assets provided by equity (i.e. owners' contributions and the company's
accumulated profits). Equity ratio can also be computed using the formula: 1 minus Debt Ratio.
The reciprocal of equity ratio is known as equity multiplier, which is equal to total assets divided by total
equity.
3. Debt-Equity Ratio = Total Liabilities / Total Equity
Evaluates the capital structure of a company. A D/E ratio of more than 1 implies that the company is a
leveraged firm; less than 1 implies that it is a conservative one.
4. Times Interest Earned = EBIT / Interest Expense
 Measures the number of times interest expense is converted to income, and if the company can pay its
interest expense using the profits generated. EBIT is earnings before interest and taxes.
Valuation and Growth Ratios
1. Earnings per Share = ( Net Income - Preferred Dividends ) / Average Common Shares
Outstanding
EPS shows the rate of earnings per share of common stock. Preferred dividends is deducted from net
income to get the earnings available to common stockholders.
2. Price-Earnings Ratio = Market Price per Share / Earnings per Share
Used to evaluate if a stock is over- or under-priced. A relatively low P/E ratio could indicate that the
company is under-priced. Conversely, investors expect high growth rate from companies with high P/E
ratio.
3. Dividend Pay-out Ratio = Dividend per Share / Earnings per Share
Determines the portion of net income that is distributed to owners. Not all income is distributed since a
significant portion is retained for the next year's operations.
4. Dividend Yield Ratio = Dividend per Share / Market Price per Share
Measures the percentage of return through dividends when compared to the price paid for the stock. A
high yield is attractive to investors who are after dividends rather than long-term capital appreciation.
5. Book Value per Share = Common SHE / Average Common Shares
Indicates the value of stock based on historical cost. The value of common shareholders' equity in the
books of the company is divided by the average common shares outstanding.
Calculation of Financial Projection
Assumptions Example
The calculation of each key assumption is shown below using the financial
statements of Apple Inc as an example.

Throughout the calculations, it is assumed that the accounting period is for a

year, and the number of days is set at 365. If the financial statements are for a
different number of days, then this number should be used instead. In
addition, in order to avoid the results being distorted by one off events, if a
number of years financial statements are available, calculate the values for
each of the years and then take an average value.

Gross margin %
The gross margin percentage is calculated using the following formula.
Gross margin % = (Revenue – Cost of sales) / Revenue

For example using the Apple Inc income statement for 2013, the gross margin
percentage is calculated as follows:
Gross margin % = (Revenue - Cost of sales) / Revenue

Gross margin % = 64,304 / 170,910

Gross margin % = 37.6%

Accounts Receivable Days

The accounts receivable days is calculated using the following formula.

Accounts receivable days = Accounts receivable / (Revenue / 365)

The formula basically takes the accounts receivable (amount outstanding from
customers), and divides this by the daily revenue, to give an indication of how
long it takes customers to pay their accounts.
For example using the Apple income statement 2013 for revenue, and the Apple
Inc. balance sheet 2013 for accounts receivable, the accounts receivable days is
calculated as follows:
Accounts receivable days = Accounts receivable / (Revenue / 365)

Accounts receivable days = 13,102 / (170,910 / 365)

Accounts receivable days = 28 days

Inventory Days
The inventory days is calculated using the following formula.

Inventory days = Inventory / (Cost of sales / 365)

The formula simply takes the inventory, and divides this by the daily cost of
sales, to give an indication of how many days cost of sales are held inventory.
Using the Apple Inc. income statement 2013 for cost of sales, and the Apple Inc.
balance sheet 2013 for inventory, the inventory days is calculated as follows:
Inventory days = Inventory / (Cost of sales / 365)

Inventory days = 1,764 / (106,606 / 365)

Inventory days = 6 days

Accounts Payable Days

The accounts payable days is calculated using the following formula.

Accounts payable days = Accounts payable / (Cost of sales / 365)

The formula uses the accounts payable (amount outstanding to trade

suppliers) from the balance sheet, and divides this by the daily cost of sales
from the income statement, to give an indication of how long it takes fro the
business to pay its suppliers.

For example using the Apple Inc. income statement 2013, and the Apple Inc.
balance sheet 2013the accounts payable days is calculated as follows:
Accounts payable days = Accounts payable / (Cost of sales / 365)

Accounts payable days = 22,367 / (106,606 / 365)

Accounts payable days = 77 days

Other Liabilities Days

The other liabilities days is calculated using the formula below.

Other liabilities days = Other liabilities / ((Operating expenses + Finance costs

+ Income tax) / 365)

The formula basically uses the other liabilities figure, and divides this by the
daily expenses (other than cost of sales), to give an indication of how long it
takes to pay other liabilities.

Again, using the Apple Inc. income statement 2013, for operating expenses,
interest costs (nil), and income tax, and the Apple Inc. balance sheet 2013 for
other liabilities (accrued expenses), then the other liabilities days can be
calculated as follows:
Other liabilities days = Other liabilities / (Operating expenses
+ Finance costs + Income tax / 365)

Other liabilities days = 13,856 / ((15,305 + 0 + 13,118) / 365)

Other liabilities days = 178 days

The process should be repeated with as many sets of financial statements as

you have available, both for different companies in your industry and for
different years. Eventually a pattern will form which will give you a good
indication of the type of values you should be considering for these key
assumptions in the financial projections.
What Is the Breakeven Point?

A company's breakeven point is the point at which its sales exactly cover its expenses. 

To compute a company's breakeven point in sales volume, you need to know the values
of three variables:

 Fixed costs: Costs that are independent of sales volume, such as rent

 Variable costs: Costs that are dependent on sales volume, such as the cost of
manufacturing the product
 Selling price of the product

How to Calculate Breakeven Point?

In order to calculate your company's breakeven point, use the following formula:

Fixed Costs ÷ (Price - Variable Costs) = Breakeven Point in Units

In other words, the breakeven point is equal to the total fixed costs divided by the
difference between the unit price and variable costs. Note that in this formula, fixed costs
are stated as a total of all overhead for the firm, whereas Price and Variable Costs are
stated as per unit costs -- the price for each product unit sold.

The denominator of the equation, price minus variable costs, is called thecontribution

margin. After unit variable costs are deducted from the price, whatever is left -- the
contribution margin -- is available to pay the company's fixed costs.

An Example of Finding the Breakeven Point

XYZ Corporation has calculated that it has fixed costs that consist of its lease,
depreciation of its assets, executive salaries, and property taxes. Those fixed costs add up
to $60,000. Their product is the widget. Their variable costs associated with producing
the widget are raw material, factory labor, and sales commissions. Variable costs have
been calculated to be $0.80 per unit. The widget is priced at $2.00 each.
Given this information, we can calculate the breakeven point for XYZ Corporation's
product, the widget, using our formula above:

$60,000 ÷ ($2.00 - $0.80) = 50,000 units

What this answer means is that XYZ Corporation has to produce and sell 50,000 widgets
in order to cover their total expenses, fixed and variable. At this level of sales, they will
make no profit but will just break even.

What Happens to the Breakeven Point if Sales Change?

What if your sales change? For example, if the economy is in a recession, your sales
might drop. If sales drop, then you may risk not selling enough to meet your breakeven
point. In the example of XYZ Corporation, you might not sell the 50,000 units necessary
to break even. In that case, you would not be able to pay all your expenses. What can you
do in this situation?

If you look at the breakeven formula, you can see that there are two solutions to this
problem: you can either raise the price of your product or you can find ways tocut your
costs, both fixed and variable.

How Cutting Costs Affects the Breakeven Point

Let's say you find a way to cut the cost of your overhead or fixed costs by reducing your
own salary by $10,000. That makes your fixed costs drop from $60,000 to $50,000.
Using the same formula and holding all other variables the same, the breakeven point
would be:

$50,000 ÷ ($2.00-$0.80) = 41,666 units

Predictably, cutting your fixed costs drops your breakeven point.

If you reduce your variable costs by cutting your costs of goods sold to $0.60 per unit, on
the other hand, then your breakeven point, holding other variables the same, becomes:
$60,000 ÷ ($2.00-$0.60) = 42,857 units

From this analysis, you can see that if you can reduce the cost variables, you can lower
your breakeven point without having to raise your price.

Relationships Between Fixed Costs, Variable Costs, Price, and

Volume

As the owner of a small business, you can see that any decision you make about pricing
your product, the costs you incur in your business, and sales volume are interrelated.
Calculating the breakeven point is just one component of cost-volume-profit analysis, but
it's often an essential first step in establishing a sales price-point that ensures a profit.