Summary of Financial Mix Ratios

RATIOS FORMULAS COMMENTS

PROFITABILITY RATIOS

Return on sales Net income / Net sales Also called as net profit rate, net profit margin;
measures profit percentage per peso sales

Gross profit rate Gross profit / Net sales Measures gross profit percentage on sales to
recover operating expenses.

Return on total assets Net income + Interest expense, Measures overall asset profitability; indicates how
net of tax / Average total assets well assets have been employed by management.

Return on stockholders' Net income / Average stockholders' Measures percentage of income derived for every
equity equity peso of owners' equity.

Return on common Earnings available to common
stockholders' equity stockholders / Average common
stockholders' equity
Earning available to common stockholders equals
net income less preferred dividends; this ratio
measures the percentage of profit derived for every
peso of common equity money used; when
compared to the return on total assets, it measures
the extent to which financial leverage is working for
or against common stockholders.

Operating leverage Contribution margin / EBIT Measures the number of times profit will increase
or decrease in relation to change in net sales.

Times preferred dividend Net income / Preferred dividend Measures the adequacy of current earnings to meet
earned requirements preferred dividend payments.
LIQUIDITY RATIOS

Operating turnover Collection period + Inventory days Measures the speed of the business cycle; the number
of days cash was invested in the normal business
operations until it was recovered back.

Inventory turnover Cost og goods sold / Average inventory Indicates the number of times inventories were
acquired and sold during the period.

Inventory days 360 days / Inventory turnover Indicates the length of time spent before the average
inventory is sold to customers; the number of days
is 365 in a year, 360 days is used for ease in computation

Receivable turnover Net credit sales / Average trade Indicates the efficiency in credit and collection poli-
receivables cies; trade receivables include open account and on
notes.

Collection period 360 days / Receivable turnover Measures quickness in collecting trade receivables

Payable turnover Net credit purchases / Average trade Measures effectiveness in using trade credit facility
payables from suppliers

Payable days 360 days / Payable turnover Indicates the number of days spent before paying
liabilities to merchandise suppliers

Materials turnover Materials used / Average materials Indicates the number of times materials were used
inventory on the average during the period.

Work-in-process turnover Cost of goods manufactured / Average Indicates the number of times average work-in-process
work-in-process inventory inventories is converted to finished goods.
Finished goods inventory Cost of goods sold / Average finished Indicates the number of times average finished goods
goods inventory is sold during the period.

Cash turnover Cash operating expenses / Average Measures the ability of the business to meet operating
cash balance expenses payments given a particular cash balance

Days to pay operating 360 days / Cash turnover Indicates the number of days spent before meeting
expenses operating expense payments.

Working capital turnover Net sales / Average working capital Measures the adequacy and effective use of working
capital; indicates reasonableness of the amount of
current assets.

Assets turnover Net sales / Average total assets Measures effectiveness of asset utilization

Current assets turnover Net sales excluding depreciation and Indicates the reasonableness of the amount of
amortization / Average current assets current assets.

Net working capital Current assets - current liabilities Indicates the amount invested by the business to
operate its normal business activities.

Current ratio Current assets / Current liabilities A rough estimate on the ability of the business to
meet its currently maturing obligations; this ratio
varies in graet disparity from one industry to another.

Quick assets ratio Quick assets / Current liabilities A more severe test of immediate liquidity to meet
currently maturing obligations; quick assets include
cash, marketable securities and receivables; this
ratio is also referred to as acid-test ratio.
Defensive-interval ratio Defensive assets / Average daily Measures the number of days defensive assets are
expenditures available to meet daily cash expenses. Defensive
assets include cash, marketable securities, and trade
receivables.

GROWTH RATIOS

Earnings per share Net income - Preferred dividends / Perhaps the most frequently quoted ratio of earnings
Average common shares outstanding and growth performance; measures the value of
common stock by attributing to it a portion of the
company's earnings.

Price-earnings ratio Market price per share / Earnings per Measures the number of period investment in stock
share will be recovered; measures the profitability of the
firm in relation to the market value of the stock;
measures investors' beliefs on the growth potential
of the stock.

Dividend yield ratio Dividend per share / Market price per Measures rate of cash return to investment in stock
share

Dividend payout ratio Dividend per share / Earnings per share Represents the percentage of net income distributed
as dividends; a low ratio may indicate the reinvestment
of profits by a growth-oriented firm.

Book value per share Stockholders' equity / Average shares Indicates the value of the stock on cost perspective;
outstanding the relevance of this ratio diminishes when the
balance sheet valuation does not approach fair
market values; may be computed for both common
 and preferred stocks.

LEVERAGE RATIOS ( or
Solvency Ratios or
Stability Ratios )

Debt-to-equity ratio Total debt / Net stockholders' equity Measures the use of debt to finance operations;
provides a measure of the relative amount of resour-
ces contributed by the creditors and owners.

Debt-to-assets ratio Total debt / Total assets Measures the relative share of creditors over the
total resources of the firm.

Equity-to-assets ratio Net stockholders' equity / Total assets Measures the amount of resources provided by the
( or equity ratio) owners in the firm.

Equity multiplier Total assets (equity) / Net Indicates the number of times owners' equity is
stockholders' equity multiplied.

Times interest earned EBIT / Interest expense Measures the long-term debt paying ability of the
firm; a high number of times interest is earned ratio
indicates that the business is under- leveraged and
its return on common equity could still be improved;
EBIT= earnings before interest and tax.

Financial leverage EBIT / (EBIT-Interest expense - Measures the risk associated in using debt to
Preferred dividend before tax) finance investments.

Total leverage Degree of operating leverage x Measures the overall leverage of the business; it
Degree of financial leverage indicates the variability of the stockhoders' equity
 with respect to changes in contribution margin, EBIT,
interest expense, and preferred dividends before tax.

Fixed charges rate Cash flows before fixed charges / Measures the ability to meet fixed charges by cash;
Total fixed charges examples of fixed charges are rent, insurance,
taxes and depreciation.

Total assets-to- total liabilities Total assets / Total liabilities A rough estimate of the firm's ability to meet interest
ratio payments to creditors.

Non-current assets-to-long-term Non-current assets / Long-term Shows the capability to meet non-current liabilities
liabilities ratio liabilities using non-current resources.

CASH FLOW RATIOS FORMULAS

Cash flow adequacy Cash from operations / Long-term debt
paid + Purchases of assets

Long-term debt payment Long-term debt payments + Cash

from operations

Divident payout on cash Dividends / Cash from operations

from operations

Reinvestment Purchase of assets / Cash from operations

Total debt coverage Total liabilities / Cash from operations

Depreciation- amortization Depreciation + Amortization / Cash

impact from operations

Cash flow to sales Cash from operations / Sales

Cash flow to net income Cash from operations / Income from
ordinary operations

Cash flow return on sales Cash from operations / Total assets