ADMS2500

Winter 2023
Financial Ratio Analysis

Topic of Analysis Ratios

Liquidity Current Ratio Quick Ratio
Working Capital Position
Profit Management Return on Assets (ROA)
Return on Common Shareholders’ Equity (ROE)
Earnings per Share (EPS)
Return on Sales (ROS), Gross Profit %, Operating income %
Debt Management Equity Ratio Equity Ratio
(Solvency, leverage) Bond Interest Coverage Preferred Dividend Coverage

Asset Management Receivable turnover; Average Collection Period

Inventory turnover
Working Capital Turnover
Asset Turnover
Market Price to Earnings Ratio
Dividend Payout Ratio
Accounts Payable Turnover
Fixed Assets Turnover
Dividend Yield

Liquidity (life or death) – ability to pay debts immediately due

1. Current Ratio = Current Assets / Current Liabilities
2. Quick Ratio = Quick Assets / Current Liabilities
(*Quick assets = cash + temporary investments + receivables)
3. Working capital = Current assets – Current liabilities

Profitability (profit management) – ability to make money

1. Return on Assets (ROA) = Operating Income / Average Total Assets
2. Return on Equity (ROE) = Operating Income / Average Owners’ Equity
Return on Common Shareholders Equity = (Net Income – Preferred Dividend) /
Average Common Shareholders’ Equity
3. Earnings Per Share (EPS) = (Net income – Preferred Div. Requirement) / Average # of
common shares
4. Vertical analysis (e.g.)
a. Gross profit percentage = gross profit / net sales
b. Operating income % = Operating Income / net sales
c. Return on Sales (ROS) = Net Income / Net Sales

Leverage (debt management, solvency, ability to meet debt obligations)

1. Debt ratio = Total Liabilities / Total Assets
2. Equity Ratio = Common Shareholders' Equity / Total Assets
3. Bond Interest Coverage = Operating Income / Annual Bond Interest
4. Preferred Dividend Coverage = Operating Income / (Annual Bond Interest + Preferred
Dividend Requirements)

Efficiency (asset Management; ability to effectively use assets)

1. Accounts Receivable Turnover = Net Sales / Average of net Accounts Receivables
 ADMS2500
Winter 2023
Financial Ratio Analysis

Average Collection Period = 365 / Accounts Receivable Turnover

2. Inventory Turnover = Cost of Goods Sold / Average Inventory
Average days of outstanding inventory = 365 / Inventory Turnover
3. Working Capital Turnover = Net Sales / Average Working Capital
4. Fixed Assets Turnover = Net Sales / Average fixed assets
5. Asset turnover = Net sales / Average total assets
6. Accounts Payable turnover = Cost of Goods Sold / Average Accounts Payable
Average days of outstanding accounts payable = 365 / Accounts Payable turnover

Cost of Goods Sold (CGS, or COGS) sometimes also called Cost of Sales
* Sales – COGS = Gross profit – operating expense = operating income – int exp –
income tax exp = net income

Market (the firm’s attractiveness/popularity to the market)

1. P/E ratio: Price Earnings Ratio = Market Price of Common Share / Earnings Per
Common Share
2. Dividend Payout Ratio = Dividends per Common Share / Earnings per Common Share
3. Dividend Yield = Dividends per Share / Market Price per share

Note
- This formula list will be provided in the final exam in alphabetical order (i.e., not
grouped into subcategories)
- Students are responsible for grouping and interpreting ratios.