SUMMARY OF RATIOS

I. RATIOS USED TO EVALUATE SHORT-TERM FINANCIAL POSITION (SHORT-

TERM SOLVENCY AND LIQUIDITY)

LIQUIDITY RATIOS
Name Formula Significance
1) Current Ratio Total Current Assets Primary test of solvency to meet
Total Current Liabilities current obligations from current
assets as a going concern;
measure of adequacy of working
capital.

2) Acid-test ratio or Quick ratio Total Quick Assets*
Total Current Liabilities
*Cash + Marketable Securities +
Accounts Receivable
A more severe test of immediate
solvency; test of ability to meet
demands from current assets.

Alternative Formula:

Current assets – (Inventory +

Prepayments)
Current liabilities

3) a) Working Capital to Total Working Capital Indicates relative liquidity of

Assets Total Assets total assets and distribution of
resources employed.
b) Working Capital Current Assets –
Current Liabilities

4) Cash Flow Cash + Marketable Securities + Measures short-term liquidity by

Adequacy/Liquidity Ratio Cash Flow from Operating considering as cash resources
Activities (numerator) cash plus cash
Current Liabilities equivalent plus cash flow from
operating activities.
II. RATIOS USED TO EVALUATE ASSET LIQUIDITY AND MANAGEMENT
EFFICIENCY

LIQUIDITY RATIOS
Name Formula Significance
1) a) Trade Receivable Turnover Net Credit Sales * Velocity of collection of trade
Average Trade Receivable (net) accounts and notes; test of
efficiency of collection.
*or Net Sales if net credit sales
figure is not available

b) Average Collection period 360 days Evaluates the liquidity of

or Number of Days’ Sales Receivable Turnover accounts receivable and the
Uncollected firm’s credit policies.
Alternative Formula:

Accounts Receivable
Net Sales / 360 days

2) Inventory Turnover
a) Merchandise Turnover Cost of Goods Sold Measures efficiency of the firm
Average Merchandise Inventory in managing and selling
inventories.

b) Finished goods inventory Cost of Goods Sold Measures efficiency of the firm
Average Finished goods in managing and selling
Inventory inventories.

c) Goods in process turnover Cost of goods manufactured Measures efficiency of the firm
Average Goods-in-Process in managing and selling
Inventory inventories.

d) Raw materials turnover Raw Materials Used Number of times raw materials
Average Raw Materials inventory was used and
Inventory replenished during the period.

e) Number of days’ sales in 360 days Measures average number of

inventories or Days Inventory Turnover days to sell or consume the
supply in inventory average inventory.

3) Working Capital Turnover Net Sales Indicates adequacy and activity

Average Working Capital of working capital.

4) Percent of each current asset Amount of each current asset Indicates relative investment in
to total current assets Total Current Assets each current asset.

5) Payable Turnover Net Purchases Measure efficiency of the

Average Accounts Payable company in meeting trade

6) Investment or Assets Net Sales
Turnover Average Total Investment or
Total Assets
7) Sales to Fixed Assets (Plant Net Sales
Assets Turnover) Average Fixed Assets (NET)
8) Capital Intensity Ratio Total Assets
Net Sales
III. RATIOS USED TO EVALUATE LONG-TERM FINANCIAL POSITION OR
STABILITY/LEVERAGE
SOLVENCY OR STABILITY RATIOS
Name Formula
1) Debt Ratio or Debt to total Total liabilities
assets ratio Total assets
2) Equity Ratio or Shareholders' Total shareholders' equity
equity to total assets ratio Total assets
3) Shareholders' equity to total Total shareholders' equity
liabilities ratio Total liabilities
4) Debt to Equity Ratio Total liabilities
Total Shareholders’ equity
5) Book Value per Share of Ordinary shareholders’ equity
Ordinary Shares No. of outstanding ordinary
shares
6) Times Interest Earned Earnings Before Interest and
Taxes (EBIT)
Interest Expense(Finance Cost)
Alternative formula:
Net Income + Interest expense +
payable.
Measures efficiency of the firm
in managing all assets.
Tess roughly the efficiency of
management in keeping plant
properties employed.
Measures efficiency of the firm
to generate sales through
employment of its resources.
Significance
Shows proportion of all assets
that are financed with debt.
Indicates proportion of assets
provided by owners. Reflect
financial strength and caution to
creditors.
`
Measures debt relative to
amounts of resources provided
by owners.
Measures recoverable amount in
the event of liquidation if assets
are realized at their book values.
Measures how many times
interest expense is covered by
operating profit.
 Tax Expense
Interest Expense
IV. RATIOS USED TO MEASURE PROFITABILITY AND RETURNS TO INVESTORS
PROFIT RATIOS
Name Formula
1) Profit Margin or Return on Net Income
Sales Ratio Net Sales
2) Cash Flow Margin Cash Flow for Operating
Activities
Net Sales
3) Return on Assets (ROA) Net Income
Average Total Assets
Alternative formula:
Asset Turnover X Profit Margin
4) Return on Equity (ROE) Net Income
Average Shareholders’ equity
Alternative formula:
Return on Assets X Equity
Multiplier*
*Equity Multiplier = 1
Equity Ratio
MARKET VALUE RATIOS
Name Formula
5) Earnings per Share Net income less preference share
dividends requirement
Average outstanding ordinary
shares
6) Price/earnings Ratio Stock Price/ Market Value per
Share
Earnings per Share
7) Dividend Payout Ratio Cash Dividend declared on
Ordinary Shares
Significance
Measures profit generated after
consideration of all expenses and
revenues.
Measures ability of the firm to
translate sales to cash.
Measures overall efficiency of the
firm in managing assets and
generating profits.
Measures rate of return on
resources provided by owners.
Significance
Peso return on each ordinary
share.
Indicative of ability to pay
dividends.
Measures relationship between
price of ordinary shares in the
open market and profit earned on
a per share basis.
Shows percentage of earnings
paid to shareholders.

Alternative formula:
8) Dividend Yield Ratio
9) Dividend per Share
10) Market to Book Value Ratio
11) Basic Earning Power Ratio
Net income
Dividends per Share
Earnings per Share
Dividend per Share Shows the rate earned by
Price/Market Value per Share shareholders from dividends
relative to current price of stock.
Dividends Paid/Declared Shows portion of income
Outstanding Ordinary Shares distributed to shareholders on a
per share basis.
Stock Price Used to evaluate a company’s
Book Value per Share current market value relative to its
book value.
Earnings Before Interest and Measures the company’s
Taxes (EBIT) efficiency at producing earnings
Total Assets relative to its assets.