Summary of Financial

Ratios
Reference:
Cabrera, M.E.B., Financial Management, Principles and Applications
Comprehensive Volume, 2019 – 2020 edition
 Liquidity and Short –term Solvency
(Ratios used to evaluate short-term financial position)
Name Formula
1. Current ratio Total Current Assets
Total Current Liabilities
2. Acid-test ratio or quick Total Quick assets
ratio Total Current Liabilities
3. Working capital to total Working capital
assets Total assets
4. Working capital Current Assets less Current
Liabilities
Significance
Primary test of solvency to
meet current obligations from
current assets as a going
concern; measure of
adequacy of working capital
A more severe/stringent test
of immediate solvency; test
of ability to meet demands
from current assets
Indicates relative liquidity of
total assets and distribution of
resources employed
Cash, 25,000; AR, 40,000; Invty, 35,000; AP, 20,000; Accrued Exp, 60,000
25,000+40,000+35,000 = 100,000 CA; 20,000+60,000=80,000 CL
25,000+ 40,000 = 65,000 Quick Assets
Working Capital ? 20,000
Current ratio?1.25:1
Quick ratio?.8125:1
Current ratio = 4:1
Working Capital = 84,000

Current assets ?112,000

Current liabilities ?28,000
 Ratios used to evaluate Asset Liquidity and
Management Efficiency
Name Formula Significance
1. Trade/Account Net Credit Sales Velocity of collection of
Receivable Turnover Average Trade/Accounts trade accounts and notes;
Receivable test of efficiency of
collection
2. Average Collection 360 days/ARTO Evaluates the liquidity of
Period/Days’ Sales or accounts receivable and
Outstanding Ave. Account Receivable the firm’s credit policies
Net sales/360
3. Inventory Turnover Cost of goods sold Measures efficiency of the
Average Inventory firm in managing and selling
inventories
4. Days supply in 360 days/ ITO Measures average number
inventory/Average age of of days to sell or consume
inventory the average inventory
Total sales, P5,000,000
AR, beg, P200,000
AR, end, P50,000
Assume 360 days a year
Cash sales is 40% of total sales

ARTO? NCS/Ave AR =
NCS= 5,000,000 x .6 = 3,000,000
Ave AR = (200,000+50,000)/2 = 125,000
ARTO = 3,000,000/125,000 = 24 times
Average collection period? 360/24 = 15 days/ 12/24 = .5month
Ave AR/net credit sales/360
125,000/3,000,000/360
125,000/8,333.3333
15 days
Inventory, dec 31 P40,000
Cost of Sales P4,500,000
Purchases P4,460,000
360 days a year

ITO ?
Ave age of invty ?
 inventory, beg XX
 Purchases XX
 GAS XX
 Inventory, end (X)
 CGS XX
 Ratios used to evaluate Asset Liquidity and
Management Efficiency

Name Formula Significance

5. Payable Turnover Net purchases
Average Accounts Payable
6. Investment or Asset Net Sales
Turnover Average Total Investment or
Average Total Assets
7. Sales to Fixed Assets Net Sales
(plant assets turnover) Average Fixed Assets (net)
8. Capital Intensity Ratio Total Assets/Net Sales
Measure efficiency of the
company in meeting trade
payable
Measures the efficiency of
the firm in managing all
assets
Tests roughly the efficiency
of management in keeping
plant properties employed
Measures efficiency of the
firm to generate sales
through employment of its
resources
 Ratios used to Measure Profitability and
Returns to Investors

Name Formula Significance

1. Gross Profit Margin
2. Net Profit Margin (Return
on Sales)
3. Return on Assets (ROA)
4. Return on Assets (ROA)
Gross Profit/Net Sales
Net Profit/Net Sales
Net Profit/Ave. Total Assets
Or
Asset turnover x ROS
Net income + Interest Exp (1-
Tax rate)/ Ave. Total Assets
Measures profit generated
after consideration of cost of
product sold
Measures profit generated
after consideration of all
expenses and revenues
Measures overall efficiency
of the firm in managing
assets and generating profits
A measure of productivity of
assets regardless of how the
assets are financed
 Ignore averages

 Total assets, 4,000, total liabilities, 1,500;net sales, 8,000; CGS, P4,000, Selling
and admin expense, P3,000.
GPM ?
NPM ?
ROA ?
ROE ?
ATO?
 Ignore averages

 Total assets, 4,000, total liabilities, 1,500;net sales, 8,000; CGS, P4,000, Selling
and admin expense, P3,000.
GPM ? 8,000-4,000=4,000GP/8,000 = 50%
NPM ?GP4,000-3,000 = 1,000NI/8,000 = 12.5%
ROA ?1,000/4000 = 25%
ROE ? 4,000 – 1,500 = 2,500E; 1,000/2,500 = 40%
ATO? 8,000/4,000 = 2x
Sales x Net income
Total Assets Sales =Net income/total assets

ATO x ROS = ROA

ROA x EM =ROE
NI/TA x TA/TE = NI/TE
 Ratios used to Measure Profitability and
Returns to Investors

Name Formula Significance

5. Return on Equity (ROE)
6. Earnings Per Share (EPS)
7. Price to Earnings Ratio
Net income Measures rate of return on
Average Ordinary Equity resources provided by
Or owners
ROA x Equity Multiplier
Net income less Preference Peso return on each ordinary
Dividends/ share. Indicative of ability to
Ave. Ordinary shares pay dividends
Market value per share of Measures relationship
Ordinary shares between price of ordinary
EPS of Ordinary shares shares in the open market
and profit earned on a per
share basis
 Ratios used to Measure Profitability and
Returns to Investors
Name Formula
8. Dividends per share Dividends paid/declared
Ordinary shares outstanding
9. Dividend Payout Dividends per share
Earnings per share
10. Dividend Yield Annual dividends per share
FMV per share of Ordinary
Shares
Significance
Shows portion of income
distributed to shareholders
on a per share basis
Shows percentage of
earnings paid to
shareholders
Shows the rate earned by
shareholders from dividends
relative to current price of
stock
 Ratios used to Evaluate Long-term Financial Position or
Stability/Leverage/Solvency
Name Formula Significance
1. Debt Ratio (DR) Total Liabilities/Total Assets Shows proportion of all assets
that are financed with debt
2. Equity Ratio (ER) Total Equity/Total Assets Indicates proportion of
assets provided by owners.
Reflects financial strength
and caution to creditors
3. Debt to Equity Ratio Total Liabilities/Total equity Measures debt relative to
amounts of resources
provided by owners
4. Fixed assets to long-term Fixed assets (net) Reflects extent of investment
liabilities Total long term liabilities in long term assets financed
from long term debt
5. Fixed assets to total equity Fixed assets (net) Measures the proportion of
Total Equity owners’ capital invested in
fixed assets
 Ratios used to Evaluate Long-term Financial
Position or Stability/Leverage/Solvency

Name Formula Significance

6. Book value per share of Ordinary shareholders equity Measures recoverable
Ordinary shares No. of outstanding ordinary amount in the event of
shares liquidation if assets are
realized at their book values
7. Times Interest Earned Net income before Interest Measures how many times
and Taxes (EBIT) interest expense is covered
Annual Interest Charges by operating profit
8. Times fixed charges Net income before taxes Measures coverage
earned and fixed charges capability more broadly
Fixed Charges (Rent + than times interest earned
Interest + Sinking fund by including other fixed
payment before taxes) charges
EBIT P35M
Interest expense P5M
Preferred stock dividend P4M
Common stock dividend payout ratio 30%
Common shares outstanding 2M
Income tax rate 40%
Times interest earned ?
Dividend per share ?
If P/E ratio is 8, what is the market price per share of common stock?
Ebit 35M-5M = 30M
30M x 40% = 12M
30M-12M = 18M
18M-4M = 14M
DPoR = .30 = Dividends/Earnings
.30 = Div/14M
Div - .3x14M
Div= 4.2M
DpS = 4.2M/2M
Dps = 2.10/share
14M/2M = 7 EPS
P/E = 8 =MV/7
MV = 8 x 7 = 56
 ROE 15%
 Debt ratio 40%
 ROS/NPM 5%
 Total Assets P800M

 Net income ?
 Total Equity ?
 Sales ?
 ROE 15%
 Debt ratio 40%
 ROS/NPM 5%
 Total Assets P800M

 Net income ? Roe = .15 = NI/480M = NI = 480 x .15 = P72M

 Total Equity ? Dr = 40%; Er = 60% x P800M = P480M
 Sales ? Ros = .05 = P72M/S = S = P72/.05 =P1,440,000,000
 DR = 40%
 ER = 60%
 800M x .60 = 480M
 Roe = NI/TE
 .15 = NI/480M
 NI = 72M
 Ros = .05 = 72M/S
 Sales = 1,440,000,000
 Total Equity P120M
 ATO 4x
 Debt to Equity 66.6667%

 Sales ?
 L/E = .66667 = L/120M = L = 120M x .66667 = 80M
 A = 80M + 120M = 200M
 ATO = 4 = S/200M = 200M x 4 = 800M Sales
 Total Equity P120M
 ATO 4x
 Debt to Equity 66.6667%

 Sales ?
 EM = TA/TE 400M/100M = 4
 ER = TE/TA

 TA 100M; TE 40M
 Em = 2.5
 ER = 40% = 40/100; 100/40 = 2.5 EM
 EM 2.5 = 2.5/1 ; 1/ 2.5 = 40%
EM = 2.5

DR?

EM = 2.5/1 = TA/TE
ER = TE/TA = 1/2.5 = 40%
DR = 60%
Dupont Formula

ROS/NPM x ATO = ROA x EM = ROE

NI/S x S/TA = NI/TA x TA/TE = NI/TE

Ros = 10%; ATO, 6 ; ER 40%

ROE = .1 x 6 = .6 x 2.5 = 150%
ER = TE/TA = .4/1
EM = TA/TE = 1/.4 = 2.5