Financial Ratios

at a Glance
 ACTIVITY RATIOS

Meaning

Annual sales The efficiency of a company in collecting its

Receivables turnover = trade receivables
Average receivables

365 The average number of days a company takes

Days of sales outstanding = to collect its receivables from clients
Receivables turnover

Cost of goods sold The efficiency of a company in terms of

Inventory turnover = inventory management
Average inventory

365
Days of inventory on hand = The average inventory processing period
Inventory turnover

Purchases The efficiency of a company in allowing trade

Payables turnover = credit to suppliers
Average trade payables

365 The average number of days a company takes

Number of days of payables = to pay its suppliers
Payables turnover ratio

Revenue The efficiency of a firm in utilizing its fixed

Fixed assets turnover =
Average net fixed assets assets

Revenue The efficiency of a firm in managing its

Working capital turnover = working capital (current assets - current
Average working capital
liabilities)

Revenue The efficiency of a firm in using its total assets

Total assets turnover = to create revenue
Average total assets

Days of sales outstanding The number of days a company takes to

Cash conversion cycle = + Days of inventory on hand convert its investments in inventory and other
- Number of days of payables resources into cash flows from sales

Revenue The efficiency of a firm in utilizing equity to

Equity turnover = create revenue
Average total equity
 LIQUIDITY RATIOS

Meaning

Current assets Ability to meet current liabilities

Current ratio = (with total current assets)
Current liabilities

Cash + Marketable securities + Receivables Ability to meet current liabilities

Quick ratio =
Current liabilities (with total current assets, excluding inventory)

Cash + Marketable securities Ability to meet current liabilities

Cash ratio = (with cash and marketable securities only)
Current liabilities

Defensive Cash + Marketable securities + Receivables The number of days a company can cover its
interval = Average daily expenditure
average daily expenses with the use of current
liquid assets only
 SOLVENCY RATIOS

Meaning

Total debt
Debt-to-equity = Debt as a percentage of total equity
Total shareholder’s equity

Total debt
Debt-to-capital = Debt as a percentage of total capital
Total debt + Total shareholder’s equity

Total debt
Debt-to-assets = Debt as a percentage of total assets
Total assets

Average total assets An indicator of a company’s debt financing

Financial leverage = usage
Average total equity

Earnings before interest and taxes

Interest coverage = The ability to cover interest expenses
Interest payments

Fixed charge Earnings before interest and taxes + Lease payments

The ability to cover interest and lease expenses
coverage = Interest payments + Lease payments
 PROFITABILITY RATIOS

Meaning

Gross profit Gross profitability as a percentage of total revenue

Gross profit margin =
Revenue

Operating income (EBIT) Operating profitability (before interest and tax) as a

Operating profit margin = percentage of total revenue
Revenue

EBT Operating profitability (before tax) as a percentage

Pre-tax margin = Revenue of total revenue

Net income
Net profit margin = Net profitability as a percentage of total revenue
Revenue

Net income Net profitability (excluding interest and taxes) as a

Return on assets (ROA) =
Average total assets percentage of total invested funds

Operating profit (EBIT) Net profitability (including interest and taxes) as a

Operating return on assets (ROA) =
Average total assets percentage of total invested funds

Operating profit (EBIT) Operating profitability as a percentage of total

Return on total capital =
Average total capital capital

Net income Net profitability as a percentage of total equity

Return on Equity (RoE) =
Average equity
 VALUATION RATIOS

Meaning

Net Income - Preferred dividends

Earnings per Share (EPS) = Income earned per 1 common share outstanding
Outstanding number of
common shares

Share price The price that investors are willing to pay per $1 of
Price earnings (P/E) ratio = earnings
Earnings per share (EPS)

Market capitalization Total price that investors are willing to pay for a
P/E ratio (company wide) = company's Net income
Net income

Dividend per share The "portion "of a share price that is distributed as
Dividend yield =
Current share price dividends

Net income - Dividends declared The "portion" of Net income that is reinvested in
Retention rate (RR) = the company
Net income

Dividends declared The "portion" of Net income that is distributed as

Dividend payout =
Net income dividends

Sustainable growth rate (g) = RR x ROE Equity growth rate

 DUPONT ANALYSIS

Return on Equity
(RoE)
Net income
Average equity

Net profit Equity

margin turnover
Net income X Revenue
Revenue Average equity

Net profit Asset Financial

margin turnover leverage ratio
Net income X Revenue X Average assets
Revenue Average assets Average equity

Interest Operating Asset Financial

Tax burden
burden profit margin turnover leverage ratio
Net income X EBT X EBIT X Revenue X Average assets
EBT EBIT Revenue Average assets Average equity