A Summary of Key Financial Ratios

Which
Ratios Financial How To Calculated Meaning +Ve -Ve Comments
Statement
Liquidity Ratios
Is a measure of its (high/low) ability to meet short-term obligations? An asset is deemed liquid if it can be readily
converted into cash

>1 to 2 ≤ 1 Or >2

if the result is greater than if the result is less than

industry average/ greater than industry average/ less than
previous year then: previous year, this means
- from creditor standpoint, that the firm has a great
Company ability to pay risk concerning it's
its short term liability they like to see a high current
ratio because if the firm getting capabilities to satisfy its
from short term assets Problem Reflected
Current into financial difficulty its obligations
Balance Sheet ( how much of current critical cash
Ratio Current assets liquidity position will be >2
assets are available to Position
Current liabilities relatively weak so, this ratio
cover each dollar of
provides the best single indicator from shareholder
current liabilities)
In Decimal (times) of the extent to which the claims standpoint,
of short-term creditors are a high current ratio could
covered by assets that are mean that the firm has a
expected to be converted to cash lot of money tied up in
fairly quickly. non-productive assets, (to
be better invested)
Quick Ratio Balance Sheet Company ability to pay It should be > 1 to be a good It should be < 1 to be a Problem Reflected
(acid test) Current Assets-Inventory its short term liability sign bad sign need to sell
Current Liabilities from current assets Moderate Result is < industry inventory
excluding inventory Result is > industry average the average/ less than year to meet its short
(without relying on the company can pay off its current before this means that the term obligation
sale of inventories ) liabilities without having to firm has a great risk
In Decimal (times)
liquidate its inventory. concerning it's
capabilities to satisfy its
 obligations

Leverage Ratios ( Debt Ratios )

Indicated that the company depends (more/ less) on debt. This make it (more/ less) risky than itself in previous years. A
company is said to be highly leveraged if it uses more debt than equity, including stock and retained earnings. The balance
between debt and equity is called the capital structure. The optimal capital structure is determined by the individual
company. Debt has a lower cost because creditors take less risk; they know they will get their interest and principal.
However, debt can be risky to the firm because if enough profit is not made to cover the interest and principal payments,
bankruptcy can occur.

 Measure the extent To know if I can

to which borrowed
funds have been
used to finance
company assets.
Total Debt-
Total Liabilities (Debt)  it describes how the
to-Total- Balance Sheet
Assets Ratio Total Assets firm is financed,
 It measures the
percentage of funds
provided by sources
other than equity.
(In %)
get a loan/finance
Low or decrease
High or increase or not,
It is preferable to
Creditors prefer low debt ratios
Stockholders, on the other be low.
because the lower the ratio, the
hand, may want more Problem Reflected
Greater the Cautious against
leverage because it The company will
creditors' losses in the event of
magnifies expected increase its
liquidation.
Earnings. expenses
Regarding to
interest rate

Measure The funds

Problem Reflected
Debt-to- Total Liabilities(Debt) provided by creditors
Balance Sheet not suitable
Equity Ratio Total stockholders’ equity versus The funds
Investment
(In %) provided by owners
Long term Liabilities(Debt) The balance between
Long term
Total stockholders’ equity debt and equity in a
Debt-to- Balance Sheet
(In %) firm’s long-term capital
Equity Ratio
structure
High or increase Low or decrease Related Ratios
Times It measures the ability
Income If the result is relatively high, Failure to meet obligations Profit Margin
Interest Earnings Before Interest & of the firm to pay
statement this means that the firm can thus, can bring legal action Ratio if the result
Earned Ratio Taxes (EBIT) interest costs
If it is not mentioned then depend on more debt on by the creditors, possibly is low this might
 Revenues- Expenses= EBIT financing its operations.
(The extent to which
If the result is moderate, this
Interest Charges (Expenses) earnings can decline
means that the firm would face means that the
without the firm
difficulties if it attempted to resulting in bankruptcy interest cost is
Decimal(times) becoming unable to
borrow additional funds. high
meet its annual interest
costs) Creditors prefer high TIE
ratios .because if it low >>>>>>
if the result is low this  if the result is
might means that the moderate, this
interest cost is high, while means that the
if the result is relatively high,
Net Income after deducting the the net income is firm would
interest expenses this means that the firm can
Profit calculated after deducting face
‫ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬ depend on more debt on
Margin Ratio the interest expenses from difficulties .
Total Sales financing its operations.
gross income; this means  if it attempted
% that the profit margin goes to borrow
lower. additional
funs

Activity Ratios ( assets ratios )

indicate how (effectively/ineffectively ) a company is managing its assets
Inventory Measures how > 1 - High or increase < 1 - Low or decrease Related Ratios
Turnover effectively the firm is sales is more than inventory then Current ratio
managing its we can recommend to increase Result is < industry Problem Reflected
Income Sales inventories production average this means that the problem in
statement (Measures the number firm is holding too much sales or
Inventory of finished goods
Balance Sheet of times that average inventory. Excess Marketing.
In Decimal (times) inventory of finished inventory is unproductive
goods were turned over and it represents an
or sold during a period investment with a low or
of time usually a year.) zero rate of return.
This means then we need
to do marketing plan &
sales.
a low turnover, we must
 wonder whether the firm is
actually holding obsolete
goods not worth their
stated value.

Inventory Measures the number of

Days of one day's worth of
inventory Cost of goods sold/365
(In Days) inventory
Total Sales =
Measures how Sales
High or increase If there is no
effectively the company Low or decrease
uses its plant and sales then we
Income Sales equipment (utilization If the result fair compared with take revenue
statement If the result is < the
Fixed Assets of fixed assets ) the industry average/ the last (Income
industry average this
Turnover Balance Sheet years,, indicating that the firm is
Fixed Assets Measures how many means that the firm doesn't statement).
using its fixed assets as
sales are generated by utilize its assets on a Total Assets
intensively as other firm in the
In Decimal (times) each dollar of fixed proper manner. from Balance
industry
assets sheet

 Measures the Low or decrease

turnover of all the If the ratio is somewhat
firm's assets. below the industry
 Whether a firm is average/ last years,
Income Sales indicating that the firm is
generating a
statement not generating a sufficient
sufficient volume of Problem Reflected
Total Assets Balance Sheet volume of business given
Total Assets business for the size High or increase Problem in
Turnover its total asset investment.
of its asset investment Assets operation
(utilization of all Recommendations:
company assets ) Sales should be increased
In Decimal (times)  Measures how many Some assets should be
sales are generated by sold
each dollar of assets Apply both solutions
 Measure the efficiency
Average of the collection policy.
Collection Accounts Receivable Low or decrease
Balance Sheet The average length of
Period (day High or increase
sales Income Annual Sales/365 time in days it takes a
outstanding) statement (In Days) firm to collect on credit
sales

Indicates the number of

Annual credit sales
Accounts times that account
Balance Sheet Accounts Receivable
Receivable receivable are cycling
Income
Turnover during the period
statement In Decimal (times)
(usually a year)

Sales Measure how

Net working effectively Net working
Capital
Net Working Capital Capital is used to
Turnover
In Decimal (times) generate sales

Profitability Ratios
Indicates that the company utilize it (assets/or finance) (more/ less) efficient than itself in previous years and generate
(high /low) net profit on each 1$ worth of sales than itself in previous years.
Measure the efficiency with which the company uses its resources. The more efficient the company, the greater is its
profitability. It is useful to compare a company's profitability against that of its major competitors in its industry. In
addition, the change in a company's profit ratios over time tells whether its performance is improving or declining.

Low or decrease
Indicates The total sales High or increase
available to cover other
expenses beyond cost of It should change its
Gross Profit Income if the result is relatively high
Margin statement goods (operating marketing strategy to
Sales - Cost of goods sold above 10%, good logistics and
expenses) and yield a increase its sales in less
Sales supply chain management
profit operations cost to increase
its net income.
(%)

Operation Income Indicates Profitability Low or decrease Recommended

High or increase
Profit statement Earnings Before Interest & without concern for It should change its strategy
 Taxes (EBIT) retrenchment &
If it is not mentioned then cost leadership as
Revenues- Expenses= EBIT we have big part
Sales wasted in
marketing strategy to administrative
(%) increase its sales in less expenses like
Margin taxes and interest salary –
operations cost to increase
its net income. departments as
HR
Revisit company
structure

Net Profit Income Indicates how much High or increase Low or decrease Problem Reflected
Margin statement After-tax profits are This means that the firm is -Costs are too
generated by each dollar using more debt to finance high
of sales. its operations. This means -Inefficient
It measures the that paying more interest operations
effectiveness of a firm's expenses which decrease -Heavy use of
operations, and goes on the net income debt
to show the combined this means that the firm
effects of liquidity, would face difficulties
Net Income (Net Profit after tax)
assets management, and if it attempted to borrow
debt on operating additional funs
Sales
results. Recommendations
(%)
If the result is relatively
low, the firm should
change its financial
strategy to be more
dependent on equity rather
than debt.
Also it should change its
marketing strategy to
increase its sales in less
operations cost to increase
 its net income.
Related Ratios
inventory
turnover ratios
if the result is
relatively low, we
recommend that
Measures the rate of the firm should
return on the total Low or decrease change its
Return on assets. A measure of this means that the firm is financial strategy
Income High or increase
Total Assets management efficiency. not utilizing its assets in a to be more
(ROA)= statement Net Income(Net Profit after tax) this means that the firm is
How much company proper way .means that the dependent on
Return on Balance Sheet Total Assets utilizing its assets in a proper
Investment generates in dollar firm is paying more equity rather than
way debt.
(ROI) return for each one Interest expenses which
dollar invested in its decrease the net income. also it should
(%) assets. change its
marketing strategy
to increase its
sales in less
Operations cost to
increase its net
income.
Return on Measures the rate of High or increase Low or decrease if the result is
Stockholder return on each dollar of This means that the firm is relatively low, we
s’ Equity recommend that
(ROE) stockholders’ using more debt to finance
the firm should
investment in the firm. its operations. This means
change its
How much company that paying more interest financial strategy
generates in dollar expenses which decrease to be more
Income
statement return for each one the net income dependent on
Net Income(Net Profit after tax)
dollar invested by equity rather than
Balance Sheet Shareholder's Equity debt.
stockholders’.
also it should
(%) a company attempting change its
to maximize the wealth marketing strategy
of its stockholders to increase its
 sales in less
should be trying to Operations cost to
maximize this ratio increase its net
income
Net Income(Net Profit after tax)
Earnings Indicates Earnings
Number of common shares of generated for each share
Per Share High or increase Low or decrease
(EPS)
stock
of common stock
(Dollar / share)
Related Ratios
Inventory
Earnings before interest & tax Turnover Ratio
(EBIT) Fixed Assets
Turnover Ratio
Total Assets Recommendation
(%) while the result
It shows the raw
Basic Low
earning power of the goes lower, the
earning This consider as a result of
Power (BEP) firm's assets, before High firm should take
Ratio low turnover ratios and necessary actions
influence of taxes and
(VIP Ratio) low profit margin on sales. to improve the
interest
turn over ratios
which its results
will be reflected
on profit margin
and on basic
earning power
ratio as well.

Growth Ratios ( market Value Ratios )( Shareholder-Return Ratios)

Measure the return earned by shareholders from holding stock in the company. Given the goal of maximizing stockholders'
wealth, providing shareholders with an adequate rate of return is a primary objective of most companies
Price to Shows the current Low High
Earnings market's evaluation of The lower the better for a new If the market price per
 Market Price per Share stock, based on earning.
Earnings per Share (EPS) Shows how much the
investor willing to pay
investor.
In Decimal (times) for each dollar of share is > 12-15 time EPS,
Ratio(P/E) earning. If it’s < 12-15 time EPS, this is
this is overvalued stock
undervalued stock.
Attractiveness of
company on equity
markets
Market Price per Share
Price to Cash Cash Flow per Share
Flow Ratio
In Decimal (times)
Annual Dividends Per Share Indicates the percentage
Dividend Annual Earnings Per Share of profit that is paid out
Payout Ratio
(%) as dividends

Annual percentage growth in Firm’s growth rate in

Sales
total sales sales

Annual percentage growth in Firm’s growth rate in

Net Income
profits profits

Earnings Annual percentage growth in Firm’s growth rate in

Per Share EPS EPS

Dividends Annual percentage growth in Firm’s growth rate in

Per Share dividends per share dividends per share

Cash Flow
Cash flow position is simply cash received minus cash distributed.
The net cash flow can be taken from a company's statement of cash flows.
Cash flow is important for what it tells us about a company's financing needs.
A strong positive cash flow enables a company to fund future investments without having to borrow money from bankers or investors.
This is desirable because the company avoids the need to pay out interest or dividends.
A weak or negative cash flow means that a company has to turn to external sources to fund future investments.
Generally, companies in strong-growth industries often find themselves in a poor cash flow position (because their investment needs are substantial), whereas
successful companies based in mature industries generally find themselves in a strong cash flow position.

A company's internally generated cash flow is calculated by adding back its depreciation provision to profits after interest, taxes, and dividend payments.
If this figure is insufficient to cover proposed new-investment expenditures, the company has little choice but to borrow funds to make up the shortfall or to
curtail investments.
If this figure exceeds proposed new investments, the company can use the excess to build up its liquidity (that is, through investments in financial assets) or to
repay existing loans ahead of schedule.

Cash Flow/Share (CFPS) = Net Income + Depreciation + Amortization

Common shares outstanding

Cash Ratio = Cash & Cash Equivalent / Current Liabilities
Working Capital = Current Assets – Current Liabilities
 EBT =Earnings after tax / 1-tax rate
 EBIT = EBT + Interest

2. Key financial ratios for measuring organizational performance:

a. return on investment
b. return on equity
c. profit margin
d. market share
e. debt to equity
f. earnings per share
g. sales growth
h. asset growth