SUMMARY OF KEY FORMULAE

Item Formula Desired Result

Working capital Current assets – Current liabilities Higher

Current Ratio Current assets / Current liabilities Higher
Quick Ratio (Acid-test) Cash+ short-term investments + AR Higher
/Current liabilities
Receivables turnover Sales / Higher
average gross accounts receivable
Collection Period Days in year / Receivables turnover Lower
Inventory turnover Cost of goods sold / Average inventory Higher
Days sales in inventory Days in year / Inventory turnover Lower
Operating cycle Days sales in inventory + collection period Lower
Debt to Total Assets Total liabilities / Total assets Lower
Debt to Equity Total liabilities / Lower
Owner’s (Shareholders’) Equity
Interest Coverage Profit + Interest expense + Income Tax Higher
Expense (EBIT) / Interest Expense
Free Cash Flow Net cash provided (used) by operating Higher
activities – cash used for investing activities
Gross Margin (%) Gross Profit / Total revenue Higher
(Gross Profit Margin)
Profit Margin (%) Net profit / Total revenue Higher
(Net Margin)
Asset turnover Net sales / Average total assets Higher
Return on Assets Net profit / average total assets Higher
Return on Equity Profit / Average shareholders’ equity Higher
(ROE)
Earnings per share Profit – Preferred dividends / Weighted Higher
(EPS) average number of common shares
Price Earnings Ratio Market price per share / Earnings per share Higher
(P/E)
Payout ratio Cash dividends / Profit Higher

Managerial Accounting Formulae

Item
Break even point in units
Break even point in dollars
CM ratio
Target sales in units
Target sales in dollars
Safety margin
Safety margin ratio
Operating leverage
Formula
Fixed costs / Contribution margin per unit
Fixed costs / CM ratio
CM / Sales
(Fixed costs + Target operating income)
Contribution margin per unit
(Fixed costs + Target operating income)
Contribution margin ratio
Budgeted sales – break even sales
Safety margin / budgeted sales
CM / Net income