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# Liquidity Ratios

## 1. Acid Test Ratio

Acid Test Ratio = (cash + marketable securities) / current liabilities The acid test ratio measures the immediate amount of cash immediately available to satisfy short term debt.

## 2. Accounts Payable Turnover Ratio

Accounts Payable Turnover Ratio = total supplier purchases / average accounts payable The accounts payable turnover ratio shows the number of times that accounts payable are paid throughout the year. A falling accounts payable turnover ratio indicates that the company is taking longer to pay its suppliers

3. Cash Ratio
Cash Ratio = cash / current liabilities The cash ratio (cash and marketable securities to current liabilities ratio) measures the immediate amount of cash available to satisfy short term debt.

## 4. Cash Debt Coverage Ratio

Cash Debt Coverage = (cash flow from operations - dividends) / total debt. The cash debt coverage ratio shows the percent of debt that current cash flow can retire. A cash debt coverage ratio of 1:1 (100%) or greater shows that the company can repay all debt within one year.

5. Current Ratio
Current ratio = current assets / current liabilities. The current ratio is used to evaluate the liquidity, or ability to meet short term debts. High current ratios are needed for companies that have difficulty borrowing on short term notice. The generally acceptable current ratio is 2:1 The minimum acceptable current ratio is 1:1 The current ratio is included in all the ratio calculating programs, which provide formula, definition and calculation of each ratio.

## 6. Debt Income Coverage Ratio

Debt Income Ratio = total debt / net income Long Term Debt Ratio = long term debt / net income The debt income ratio shows debt as a portion of net income. The debt income ratio shows the amount of total debt in proportion to net income. The debt income ratio is the inverse of the years debt ratio, which shows the number of years it will take to pay off all debt and replace assets when due (assuming no dividends are paid). The long term debt ratio shows the number of years to retire long term debt from net income.

## 7. Debt Service Coverage Ratio

Debt Service Coverage Ratio = net operating income / (interest + current portion of LTD) The debt service coverage ratio is also known as the debt coverage ratio, debt service capacity ratio or DSCR.

The debt service coverage ratio shows the ability to meet annual interest and debt repayment obligations. A debt service coverage ratio of less than 1:1 means that it does not have sufficient income to meet its debt demands.

## 8. Long Term Debt to Shareholders Equity (Gearing) Ratio

Gearing Ratio = long term debt / shareholders equity. The long term debt to shareholders equity ratio is also referred to as the gearing ratio. A high gearing ratio is unfavorable because it indicates possible difficulty in meeting long term debt obligations.

9. Quick Assets
Quick Assets = cash + marketable securities + accounts receivable. Quick assets are the amount of assets that can be quickly converted to cash. Quick assets are used to determine the quick ratio and days of liquidity ratio.

## 10. Quick Ratio

Quick ratio = (cash + marketable securities + accounts receivable) / current liabilities. The quick ratio is used to evaluate liquidity. Higher quick ratios are needed when a company has difficulty borrowing on short term notice A quick ratio of over 1:1 indicates that if the sales revenue disappeared, the business could meet its current obligations with the readily available "quick" funds on hand.

A quick ratio of 1:1 is considered satisfactory unless the majority of "quick assets" are in accounts receivable and the company has a pattern of collecting accounts receivable slower than paying accounts payable.

## 11. Working Capital

Working Capital = current assets - current liabilities. Working Capital Ratio = current assets / current liabilities The working capital ratio is also referred to as the current ratio. See current ratio definition and explanation.

Working capital is the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is needed if the business is unable to borrow on short notice. Banks look at working capital over time to determine a company's ability to weather financial crises. Loans often specify minimum working capital requirements

## 12. Working Capital from Operations to Total Liabilities

Working Capital from Operations to Total Liabilities = working capital provided from operations / current liabilities This ratio measures the degree by which internally generated working capital is available to satisfy obligations.

## 13. Working Capital Provided by Net Income

Working Capital Provided by Net Income = Net income - depreciation

A high ratio indicates that a company's liquidity position is improved because net profits result in liquid funds.

Efficiency Ratios
1. Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio = annual credit sales / average accounts receivable This is the ratio of the number of times that accounts receivable amount is collected throughout the year. A high accounts receivable turnover ratio indicates a tight credit policy.

A low or declining accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts

## 2. Age of Inventory Ratio

Age of Inventory = 365 days / inventory turnover ratio The Age of Inventory shows the number of days that inventory is held prior to being sold.

An increasing age of inventory ratio indicates a risk in the company's inability to sell its products. Individual inventory items should be examined for obsolete or overstocked items. A decreasing age of inventory may represent under-investment in inventory. The Age of Inventory Ratio is also referred to as the Number of Days Inventory, Days Inventory or Inventory Holding Period.

## 3. Collection Period (or Average Collection Period) Ratio

Collection Period = Accounts Receivable X 365 days Credit Sales

Collection Period =

## 365 days Accounts Receivable Turnover Ratio

The average collection period calculation uses the average accounts receivable over the sales period. The collection period or average collection period must be compared to competitors to see whether the credit given, and customer risk, is in line with the industry. A high collection period shows a high cost in extending credit to customers.

## 4. Average Inventory Period Ratio

Average Inventory Period = (inventory x 365 days) / cost of sales. The average inventory period is also referred to as Days Inventory and Inventory Holding Period. This ratio calculates the average time that inventory is held.

Individual inventories should be looked at to find areas where the inventory, and inventory holding period, can be reduced. The average inventory period should be compared to competitors

## 5. Average Obligation Period Ratio

Average Obligation Period = accounts payable / average daily purchases. The average obligation period ratio measures the extent to which accounts payable represents current obligations (rather than overdue ones).

## 6. Bad Debts Ratio

Bad Debts Ratio = bad debts / accounts receivable. The bad debts ratio is an overall measure of the possibility of the business incurring bad debts. The higher the bad debts ratio, the greater the cost of extending credit.

7. Breakeven Point
Breakeven Point = fixed costs / contribution margin. The breakeven point is the point at which a business breaks even (incurs neither a profit nor a loss) The breakeven point is the minimum amount of sales required to make a profit. Increasing breakeven points (period to period) indicates an increase in the risk of losses.

## 8. Cash Breakeven Point

Cash Breakeven Point = (fixed costs - depreciation) / contribution margin per unit.

The cash breakeven point indicates the minimum amount of sales required to contribute to a positive cash flow.

## 9. Cash Dividend Coverage Ratio

Cash Dividend Coverage = (cash flow from operations) / dividends. The cash dividend coverage ratio reflects the company's ability to meet dividends from operating cash flow. A cash dividend coverage ratio of less than 1:1 (100 %) indicates that dividends are draining more cash from the business than it is generating.

## 10. Cash Maturity Coverage Ratio

Cash Maturity Coverage = (cash flow from operations - dividends) / current portion of long term maturities. The cash maturity coverage ratio indicates the ability to repay long term maturities as they mature. The cash maturity coverage ratio indicates whether long term debt maturities are in time with operating cash flow.

## 11. Cash Reinvestment Ratio

Cash Reinvestment Ratio = increases in fixed assets and working capital / (net income + depreciation). This ratio indicates the degree to which net income is absorbed (reinvested) in the business. A cash reinvestment ratio of greater than 1:1 (100%) indicates that more cash is being use4d in the business than being obtained.

## 12. Cash Turnover Ratio

Cash Turnover = (cost of sales {excluding depreciation}) / cash. Cash Turnover Ratio = (365 days)/ cash balance ratio.

The cash turnover ratio indicates the number of times that cash turns over in a year.

## 13. Collection Period to Payment Period Ratio

Collection Period to Payment Period = collection period / payment period. The collection period to payment period above 1:1 (100%) indicates that suppliers are being paid more rapidly than the company is collecting from their customers.

## 14. Days of Liquidity Ratio

Days of Liquidity = (quick assets x 365 days) / years cash expenses. The days of liquidity ratio indicates the number of days that highly liquid assets can support without further cash coming from cash sales or collection of receivables.

## 15. Fixed Charge Coverage Ratio

Fixed Charge Coverage Ratio = (Net Income Before Interest and Taxes + interest + fixed costs) / fixed costs. The fixed charge coverage ratio indicates the risk involved in ability to pay fixed costs when business activity falls.

## 16. Margin of Safety Ratio

Margin of Safety Ratio = (expected sales - breakeven sales) / breakeven sales. The margin of safety ratio shows the percent by which sales exceed the breakeven point.

## 17. Revenue per Employee / Net Sales per Employee

Revenue per employee (net sales per employee) = net sales / number of employees This ratio indicates the average revenue generated per person employed.

## 18. Number of Days Inventory Ratio

Number of Days Inventory = 365 days / inventory turnover ratio. The number of days inventory is also known as average inventory period and inventory holding period. A high number of days inventory indicates that their is a lack of demand for the product being sold. A low days inventory ratio (inventory holding period) may indicate that the company is not keeping enough stock on hand to meet demands.

## 19. Operating Cycle Ratio

Operating Cycle = age of inventory + collection period. The operating cycle is the number of days from cash to inventory to accounts receivable to cash. The operating cycle reveals how long cash is tied up in receivables and inventory. A long operating cycle means that less cash is available to meet short term obligations.

## 20. Payment Period Ratio

Payment Period = (365 days x supplies payable) / inventory. The payment period indicates the average period for paying debts related to inventory purchases.

## 21. Payment Period to Average Inventory Period Ratio

Payment Period to Average Inventory Period = payment period / average inventory period A payment period to average inventory period above 1:1 (100%) indicates that the inventory is sold before it is paid for (inventory does not need to be financed). (The average inventory period is also known as the inventory holding period)

## 22. Payment Period to Operating Cycle Ratio

Payment Period to Operating Cycle = payment period / (average inventory period + collection period). A payment period to operating cycle ratio above 1:1 (100%) indicates that the inventory is sold and collected before it is paid for (inventory does not need to be financed). A high payment period to operating cycle ratio indicates that the company may be vulnerable to tightened terms of payments from their suppliers. (The average inventory period is also known as the inventory holding period)

Profitability Ratios

## 1. Cash Debt Coverage Ratio

Cash Debt Coverage = (cash flow from operations - dividends) / total debt. The cash debt coverage ratio shows the percent of debt that current cash flow can retire. A cash debt coverage ratio of 1:1 (100%) or greater shows that the company can repay all debt within one year.

## 2. Cash Return on Assets Ratios

Cash Return on Assets (excluding interest) = (cash flows from operations before interest and taxes) / total assets. Cash Return on Assets (including interest) = (cash flow from operations) / total assets. A higher cash return on assets ratio indicates a greater cash return. The cash return on assets (excluding interest) contains no provision for replacing assets or future commitments. The cash return on assets (including interest) indicates internal generation of cash available to creditors and investors.

## 3. Cash Return to Shareholders Ratio

Cash Return to Shareholders = cash flow from operations / shareholders equity The cash return to shareholders ratio indicates a return earned by shareholders.

## 4. Contribution Margin and Contribution Margin Ratio

Contribution Margin = sales - variable costs. Contribution Margin Ratio = (sales - variable costs)/sales.

Contribution margin is the amount generated by sales to cover fixed costs. The contribution margin ratio indicates the percent of sales available to cover fixed costs and profits. Current Return on Training and Development Current Return on Training and Development = increase in productivity and knowledge contribution / training costs This ratio is a general indicator of the current return on training and development.

## 5. Gross Profit Margin Ratio (Gross Margin Ratio)

Gross Profit Margin Ratio = gross profit / sales. Gross profit margin ratio is also called gross margin ratio. To calculate gross profit subtracts cost of sales (variable costs) from sales. (I.e. gross profit = sales - cost of sales) A low gross profit margin ratio (or gross margin ratio) indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low gross profit margin ratio (or gross margin ratio) indicates that the business is unable to control its production costs. The gross profit margin ratio (or gross margin ratio) provides clues to the company's pricing, cost structure and production efficiency. The gross profit margin ratio (or gross margin ratio) is a good ratio to benchmark against competitors.

## 6. Operating Margin Ratio

Operating Margin = net profits from operations / sales. The operating margin is also referred to as operating profit margin, or EBIT to sales ratio.

The operating margin ratio determines whether the fixed costs are too high for the production volume.

## 7. Profit Margin Ratios

Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales. Pretax Margin Ratio = net profit before taxes / sales. Operating Profit Margin (Operating Margin) = net income before interest and taxes / sales. These three profit margin ratios state how much profit the company makes for every dollar of sales. The net profit margin ratio is the most commonly used profit margin ratio. Low profit margin ratios indicate that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low profit margin ratio indicates that the business is unable to control its production costs. The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency. The profit margin ratio is a good ratio to benchmark against competitors.

## 8. Return on Assets Ratio

Return on Assets = net profit before taxes / total assets. The return on assets ratio provides a standard for evaluating how efficiently financial management employs the average dollar invested in the firm's assets, whether the dollar came from investors or creditors.

A low return on assets ratio indicates that the earnings are low for the amount of assets. The return on assets ratio measures how efficiently profits are being generated from the assets employed. A low return on assets ratio compared to industry averages indicates inefficient use of business assets.

## 9.Return on Common Equity Ratio

Return on Common equity = (net profit - preferred share dividends) / (shareholders equity- preferred shares). The return on common equity ratio shows the return to common stockholders after factoring out preferred shares. A return of over 10% indicates enough to pay common share dividends and retain funds for business growth.

## 10. Return on Investment Ratio

Return on Investment Ratio = net profits before tax / shareholders equity. The return on investment ratio provides a standard return on investor's equity. The return on investment ratio is also referred to as return on investment or ROI. Return on Investment is a key ratio for investors.

## 11. Return on Sales Ratio

Return on Sales = Net Profit / Sales

## 12. Times Interest Earned Ratio

Times Interest Earned Ratio = (net income + interest) / interest. The times interest earned ratio indicates the extent of which earnings are available to meet interest payments. A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rate.

Turnover Ratio
1. Accounts Payable Turnover Ratio
Accounts Payable Turnover Ratio = total supplier purchases / average accounts payable The accounts payable turnover ratio shows the number of times that accounts payable are paid throughout the year. A falling accounts payable turnover ratio indicates that the company is taking longer to pay its suppliers.

## 2. Accounts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio = annual credit sales / average accounts receivable This is the ratio of the number of times that accounts receivable amount is collected throughout the year. A high accounts receivable turnover ratio indicates a tight credit policy. A low or declining accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts.

## 3. Asset Turnover Ratio

Asset Turnover Ratio = sales / fixed assets. A low asset turnover ratio means inefficient utilization or obsolescence of fixed assets, which may be caused by excess capacity or interruptions in the supply of raw materials.

## 4. Cash Turnover Ratio

Cash Turnover = (cost of sales {excluding depreciation}) / cash. Cash Turnover Ratio = (365 days)/ cash balance ratio. The cash turnover ratio indicates the number of times that cash turns over in a year.

## 5. Inventory Conversion Ratio

Inventory Conversion Ratio = (sales x 0.5) / cost of sales. The inventory conversion ratio indicates the extra amount of borrowing that is usually available upon the inventory being converted into receivables.

## 6. Inventory Turnover Ratio

Inventory Turnover Ratio = cost of goods sold / average inventory. The inventory turnover ratio measures the number of times a company sells its inventory during the year. A high inventory turnover ratio indicated that the product is selling well. The inventory turnover ratio should be done by inventory categories or by individual product.

Leverage Ratios
1. Capital Acquisition Ratio
Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions. The capital acquisition ratio reflects the company's ability finance capital expenditures from internal sources. A ratio of less than 1:1 (100 %) indicates that capital acquisitions are draining more cash from the business than it is generating.

## 2. Capital Employment Ratio

Capital Employment Ratio = sales / (owners equity - non-operating assets). The capital employment ratio is also referred to as the capital employed ratio.

The capital employment ratio shows the amount of sales which owner's investment in operations generates.

## 3. Capital Structure Ratio

Capital Structure Ratio = long term debt / (shareholders equity + long term debt). The capital structure ratio shows the percent of long term financing represented by long term debt. A capital structure ratio over 50% indicates that a company may be near their borrowing limit (often 65%).

## 4. Capital to Non-Current Assets Ratio

Capital to Non-Current Assets Ratio = owners equity / non-current assets A higher capital to non-current assets ratio indicates that it is easier to meet the business' debt and creditor commitments

## 5. Cash Balance Ratio

Cash Balance = (cash x 365 days) / (cost of sales [excluding depreciation]) The Cash Balance Ratio is also referred to as Days Cash Balance. The cash balance ratio indicates the number of days that a company can pay its debts, as they become due, out of current cash.

## 6. Debt to Assets Ratio

Debt to Assets = total debt / total assets The debt to assets ratio indicates the extent to which assets are encumbered with debt. A debt to assets ratio over 65% indicates excessive debt

## 7. Debt to Equity Ratio (Financial Leverage Ratio)

Debt to Equity Ratio = Short Term Debt + Long Term Debt / Total Shareholders Equity Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest and principal while obtaining more funding.

8. Debt Ratio
Debt Ratio = liabilities / assets The debt ratio is also known as the debt to capital ratio, debt to equity ratio or financial leverage ratio. The debt ratio shows the reliance on debt financing. A high debt ratio is unfavorable because it indicates that the company is already overburdened with debt.

## 9. Defensive Interval Period Ratio

Defensive Interval Period = (cash + marketable securities + accounts receivable) / average daily purchases. This ratio indicates how long a business can operate on its liquid assets without needing further revenues. The defensive interval period reveals near-term liquidity as a basis to meet expenses.

## 10. Equity Multiplier Ratio

Equity Multiplier = total assets / shareholders equity. The equity multiplier ratio discloses the amount of investment leverage.

## 11. Financial Leverage Ratio

Financial Leverage Ratio = total debt / shareholders equity. The financial leverage ratio is also referred to as the debt to equity ratio. The financial leverage ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the financial leverage ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining more funding.

## 12. Fixed Assets to Short Term Debt Ratio

Fixed Assets to Short Term Debt = fixed assets / (accounts payable + current portion of long term debt). The fixed assets to short term debt ratio can indicate dangerous financial policies due to business vulnerability in a tight money market. A low fixed asset to short term debt ratio indicates the return on fixed assets may not be realized before long term liabilities mature.

## 13. Fixed Costs to Total Assets Ratio

Fixed costs to total assets = fixed costs / total assets An increase in the fixed costs to total assets ratio may indicate higher fixed charges, possibly resulting in greater instability in operations and earnings.

## 14. Fixed Coverage Ratio

Fixed coverage = earnings before interest and taxes / fixed charges before taxes. The fixed coverage ratio indicates the ability of a business to pay fixed charges (fixed costs) when business activity falls.

## 15. Debt to Equity Ratio (Financial Leverage Ratio)

Debt to Equity Ratio = Short Term Debt + Long Term Debt / Total Shareholders Equity Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest and principal while obtaining more funding.

## 16. Interest Coverage Ratio

Interest Coverage Ratio = (net income + interest) / interest. The interest coverage ratio is also referred to as the times interest earned ratio. The interest coverage ratio indicates the extent of which earnings are available to meet interest payments. A lower interest coverage ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates.

## 17. Debt to Equity Ratio (Financial Leverage Ratio)

Debt to Equity Ratio = Short Term Debt + Long Term Debt / Total Shareholders Equity

Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Upper acceptable limit of the debt to equity (debt or financial leverage) ratio is usually 2:1, with no more than one-third of debt in long term. A high financial leverage or debt to equity ratio indicates possible difficulty in paying interest and principal while obtaining more funding.

## 18. Long Term Debt to Shareholders Equity Ratio

Gearing Ratio = long term debt / shareholders equity. A high gearing ratio is unfavorable because it indicates possible difficulty in meeting long term debt obligations.

## 19. Non-Current Assets to Non-Current Liabilities Ratio

Non-Current Assets to Non-Current Liabilities = non-current assets / non-current liabilities This ratio indicates protection (collateral) for long term creditors. A lower ratio means that there is a lower amount of assets backing long term debt.

## 20. Operating Leverage Ratio

Operating Leverage = percent change in EBIT / percent change in sales. The operating leverage reflects the extent to which a change in sales affects earnings. A high operating leverage ratio, with a highly elastic product demand, will cause sharp earnings fluctuations.

## 21. Retained Earnings to Total Assets Ratio

Retained Earnings to Total Assets = retained earnings / total assets This ratio indicates the extent to which assets have been paid for by company profits. Retained earnings to total assets ratio near 1:1 (100%) indicates that growth has been financed through profits, not increased debt. A low ratio indicates that growth may not be sustainable as it is financed from increasing debt, instead of reinvesting profits.

## 22. Short Term Debt to Depreciation Ratio

Short Term Debt to Depreciation = current portion of long term debt / depreciation A short term debt to depreciation ratio of close to 1:1 (100%) indicates that the repayment of long term debt is in line with the life of the assets. This ratio should be in line with inflation in fixed asset prices

## 23. Short Term Debt to Liabilities Ratio

Short Term Debt to Liabilities = (accounts payable + current portion of long term debt) / (accounts payable + long term debt) This ratio indicates liquidity. A higher ratio means less liquidity.

## 24. Short to Long Term Debt Ratio

Short Term Debt to Long Term Debt = current portion of long term debt / long term debt. The short to long term debt ratio can indicate if a business is vulnerable to a money market squeeze.

## Cash Flow Ratios

1. Cash Flow from Operations to Net Income Ratio
Cash Flow from Operations to Net Income = (cash flow from operations) / net income The cash flow from operations to net incomes ratio indicates the extent to which net income generates cash in a business. A decline in the cash flow from operations to net income ratio indicates a cash flow problem. The cash flow from operations to net income ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.

2. Cash Flow for Investing to Cash Flows from Operating and Financing
Cash Flow from Investing to Operating and Financing = cash flows from investing / (cash flows fro operations + cash flows from financing) This ratio compares the funds needed for investment to the funds obtained from financing and operations. The ratio of cash flow for investing to cash flows from financing and operations is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.

## 3. Cash Flows for Investing vs. Financing Ratio

Cash Flow for Investing vs. Financing = (net cash flows - current portion of long term debt) / (net cash flows from operating and financing activities)

The cash flow for investing vs. financing compares funds needed for investment to the funds obtained from financing and operations

## 4. Cash Flow from Sales to Sales Ratio

Cash Flow from Sales to Total Sales = (cash flow from operations dividends) / total sales The cash flow from sales to sales ratio indicates the degree to which sales generate cash retained by the business. A positive cash flow from sales to sales ratio means that sales are generating cash flow.

## 5. Cash Flow Coverage Ratio

Cash Flow Coverage Ratio = net income + depreciation and amortization/total debt payments. The cash flow coverage ratio indicates the ability to make interest and principal payments as they become due. A cash flow coverage ratio of less than one indicates bankruptcy within two years.

## 6. Cash Flow to Long Term Debt Ratio

Cash Flow to Long Term Debt = cash flow / long term debt The cash flow to long term debt ratio appraises the adequacy of available funds to pay obligations.

## 7. Cash Flow from Operations to Current Portion of Long Term Debt

Cash Flow from Operations to Current Portion of LTD = cash flow from operations / current portion of long term debt This ratio indicates the ability to retire debt as currently structured.

A ratio of less than 1:1 (100%) indicates that debt is structured to be repaid quicker than the company has the ability to.

8. Net Cash
Net Cash = net profit + depreciation + amortization Net cash is also called cash flow. It reflects how much cash the business generates.

## 9. Net Cash Flows for Investing Ratio

Net Cash Flow for Investing = (purchase of fixed assets and securities) / net cash flows from financing activities. The net cash flows for investing ratio determine the adequacy of debt and equity issuances.

## 10. Operations Cash Flow to Current Liabilities Ratio

Operations Cash Flow to Current Liabilities = cash flow from operations / current liabilities If the operations cash flow to current liabilities ratio keeps increasing, it may indicate that cash inflows are increasing and need to be invested.

11. Operations Cash Flow Plus Fixed Charges to Fixed Charges Ratio
Operations Cash Flow Plus Fixed Charges to Fixed Charges = (cash flow from operations + fixed cost) / fixed costs This ratio indicates the risk involved when business activity, and ability to pay fixed costs, falls.

## 12. Operations Cash Flow Plus Interest to Interest Ratio

Operations Cash Flow Plus Interest to Interest = (cash flow from operations + interest) / interest

This ratio indicates the cash actually available to meet interest charges. A ratio of less than 1:1 (100%) indicates insufficient cash flow is being generated to meet current interest payments.

Sales Ratios
1. Sales to Accounts Payable Ratio
Sales to Accounts Payable = Sales / accounts payable A high sale to accounts payable ratio indicates the inability to obtain short-term credit on the form of cost-free funds to finance sales growth.

## 2. Sales to Break-even Point Ratio

Sales to Break-even (or Breakeven) Point = sales / break-even point This ratio reflects the extent to which profits are not vulnerable to a decline in sales. A sales to breakeven point ratio near 1:0 (100%) means that the company is quite vulnerable to economic declines. A ratio below 1:1 (100%) indicates that the company's sales are inadequate to cover fixed costs.

## 3. Sales to Cash Ratio

Sales to Cash = sales / cash This is sometimes referred to as a cash turnover ratio. High sales to cash ratio may indicate a cash shortage. A low ratio many reflect the holding of idle and unnecessary cash balances.

## 4. Sales to Current Assets Ratio

Sales to Current Assets = sales / current assets A high sale to current assets ratio indicates deficient working capital.

## 5. Sales to Fixed Assets Ratio

Sales to Fixed Assets = sales / fixed assets. The sales to fixed assets ratio is often called the asset turnover ratio. A low sale to fixed assets ratio means inefficient utilization or obsolescence of fixed assets, which may be caused by excess capacity or interruptions in the supply of raw materials.

## 6. Ratio of Sales to Net Income

Sales to Net Income = sales / net income A declining ratio is a cause for concern.

## 7. Sales to Total Assets Ratio

Sales to Total Assets = sales / total assets A low ratio indicates that the total assets of the business are not providing adequate revenue.

## 8. Sales to Working Capital Ratio

Sales to Working Capital = sales / working capital A high ratio may indicate inadequate working capital, which reflects negatively on liquidity.

9. Trend in Sales
Trend in Sales is the rate at which sales are increasing or decreasing The trend in sales is also referred to as the sales trend.

## Net Income Ratios

1. Ratio of Net Income Increases to Pay Increases
Net Income Increases to Pay Increases = change in net income / change in salaries, wages and benefits This ratio shows whether net income is increasing faster than wages (in dollar terms). A ratio of less than 1:1 (100%) indicates that profitability increases are less than the increases in wages. A recurring ratio of less than 1:1 (100%) indicates eroding profits and is a cause for concern. This ratio calculates the effect in dollar terms. The analyst should also calculate percent increase in net income to percent increase in salaries, wages and benefits.

## 2. Profits per Employee / Net Income per Employee

Profits per Employee (Net Income per Employee) = net income / number of employees This ratio indicates the average profit generated per person employed.

## 3. Net Income to Assets Ratio

Net Income to Assets = net profit before taxes / total assets. The net income to assets ratio is also referred to as the return on assets ratio. The net income to assets ratio provides a standard for evaluating how efficiently financial management employs the average dollar invested

in the firm's assets, whether the dollar came from investors or creditors. A low net income to assets ratio indicates that the earnings are low for the amount of assets. The net income to assets ratio measures how efficiently profits are being generated from the assets employed. A low net income to assets ratio compared to industry averages indicates inefficient use of business assets.

## 4. Ratio of Net Income to Fixed Charges

Net Income to Fixed Charges = net income / fixed charges

## 5. Net One Time Gains to Net Income Ratio

Net One Time Gains to Net Income = extraordinary profit or loss / net income A rising percent in extraordinary profit / loss or prior period adjustments indicates deterioration in earnings quality, which will be reflected in a lower multiplier when determining the value of the shares.

## 6. Ratio of Non-Operating Income to Net Income

Non-operating Income to Net Income = non-operating income / net income Increasing ratios may indicate changes in accounting made to boost profits. Increasing ratios may mean that the business is moving away from its core business.

## 7. Ratio of Operating Income to Wages and Salaries

Operating Income to Wages and Salaries = operating income / (salaries + wages + benefits)

This ratio shows the relationship between operating income and amount of wages and salaries paid. A declining trend indicates a narrowing of margins and is a cause for concern.

## 8. Percent Change in Operating Income versus Sales Volume Ratio

Percent change in operating income vs. sales volume = % change in operating income / % change in sales volume An increase may indicate higher fixed charges.

Labor Ratios
1. Change in Employment Ratio
Change in Employment = increase/(decrease) in the number of employees

This ratio shows how many more (fewer) employees the company has than the previous year.

## 2. Fixed Labor to Total Labor Costs Ratio

Fixed Labor to Total Labor = fixed Labor costs (including benefits) / total Labor costs (including benefits)

Shows the extent to which Labor costs are fixed. A low percent is preferred, especially in industries with volatile demands or seasonality.

## 3. Ratio of Labor Costs to Net Income

Labor Cost to Net Income = (salaries, wages and benefits) / net income This ratio measures the extent to which Labor costs number of employees x average wage and benefit per employee) affect net income. This ratio indicates the extent to which a reduction in unproductive Labor (as a percent of total Labor costs) may increase net income.

## 4. Ratio of Labor Costs to Sales

Labor Cost to Sales = (salaries, wages and benefits) / sales

This ratio indicates the extent to which Labor costs must be absorbed into sales prices.

## 5. Ratio of Labor Costs to Total Costs

Labor Cost to Total Costs = (salaries, wages and benefits) / total costs

## 6. Percent Change in People Employed Ratio

Percent Change in People Employed = (the change in the number of employees) / number of employees in previous year) x 100%

## 7. Percent Increase in Wages or Salaries per Employee

Percent Increase in Wages or Salaries per Employee = ((current year average wage and benefit per employee - previous year average wage and benefit per employee)/ previous year average wage and benefit per employee) x 100%

## Discretionary Cost Ratios

1. Ratio of Discretionary Costs as a Percent of Sales
Discretionary costs = advertising + research and development + training + repairs and maintenance costs Discretionary costs as a percent of sales = (discretionary costs / sales) x 100% A decreasing trend indicates profit may have come from reductions in discretionary costs which may negatively affect future profits.

## 2. Equipment Replacement Ratio

Equipment Replacement Ratio = change in undercoated assets / depreciation.

The equipment replacement ratio indicates whether the company is spending sufficient funds on replacing assets.

## 3. Equipment Upkeep Ratio

Equipment Upkeep Ratio = equipment repairs and replacement costs / total revenues. A decline in the equipment upkeep ratio indicates eroding revenues.

## 4. Fixed Charge Coverage Ratio

Fixed Charge Coverage Ratio = (Net Income Before Interest and Taxes + interest + fixed costs) / fixed costs. The fixed charge coverage ratio indicates the risk involved in ability to pay fixed costs when business activity falls.

## 5. Fixed Costs (Excluding Labor) per Employee

Fixed costs (excluding Labor) per employee = fixed costs - fixed Labor costs / number of employees The fixed costs (excluding Labor) per employee ratio shows the overhead factor (excluding Labor) that each employee carries

## 6. Fixed Costs to Total Assets Ratio

Fixed costs to total assets = fixed costs / total assets An increase in the fixed costs to total assets ratio may indicate higher fixed charges, possibly resulting in greater instability in operations and earnings.

## 7. Long Term Return on Training and Development

Long Term Return on Training and Development = increase in productivity and knowledge assets / training costs This ratio is a general indicator of the long term return on training and development. An average of several years' ratios should be used to compensate for training and development cost fluctuations.

## 8. Office Repairs and Supplies Costs per Employee

Office repairs and supplies per employee = office repairs and supplies / number of employees This ratio shows the cost of office repairs and supplies per employee. This is one factor that may be taken into consideration when planning staff reductions, or budget planning.

## 9. Percent Growth in Productivity and Knowledge Assets

Percent Growth in Productivity and Knowledge Assets = growth in productivity and knowledge assets / previous year productivity and knowledge assets This ratio indicates the rate of growth or decline in the quality of employees.

## 10. Phone Costs per Employee

Phone costs per employee = phone costs / number of employees This ratio shows the cost of telephone charges per employee. This is one factor that may be taken into consideration when planning staff reductions, or budget planning.

## 11. Productivity and Knowledge Assets

Productivity and Knowledge Assets = productivity and knowledge contribution x 6 This ratio indicates the amount of assets residing in the knowledge and skills of employees.

## 12. Productivity and Knowledge Contributed per Employee

Productivity and Knowledge Contributed per Employee = productivity and knowledge contribution / number of employees This ratio indicates the average amount of excess net income that each employee adds through experience, training, productivity and creativity.

## 13. Productivity and Knowledge Contribution

Productivity and Knowledge Contribution = net income - normal return on investment This ratio shows the amount of net income that comes from employees (versus capital). In a competitive environment, margins and profits will be forced to yield normal returns for shareholders. This ratio indicates the contribution of the company being run better or smarter than normal

## 14. Repairs and Maintenance Costs to Associated Assets

Repairs and Maintenance to Associated Assets = repairs and maintenance / fixed assets A decreasing trend may indicate a company's failure to maintain capital facilities.

## 15. Training Costs per Employee

Training Costs per Employee = training costs / number of employees This ratio shows the average amount spent on training each employee in the period. A decline may indicate future declines in productivity. An increase may indicate and increase in employee turnover.

## Foreign Risk Ratios

1. Percent Export Earnings Ratio
Percent Export Earnings = (export earnings x 100%) / total earnings The percent export earnings indicate the earnings risk associated with currency risks.

## 2. Percent Export Revenues Ratio

Percent Export Revenues = (export revenue x 100%) / total revenue

The percent export revenue indicates the sales volume risk associated with currency risks.

## 3. Percent Unstable Foreign Earnings Ratio

Percent Unstable Foreign Earnings = (earnings from politically unstable countries x 100%) / net earnings The percent unstable foreign earnings indicate the amount of earnings at risk because of political instability of the country (ies) of origin.

## 4. Percent Unstable Foreign Revenue Ratio

Percent Unstable Foreign Revenues = (revenues from politically unstable countries x 100%) / total revenues The percent unstable foreign revenues indicate the amount of revenue at risk because of political instability of the country (ies) of origin.

## Costs Per Employee

1. Fixed Costs per Employee
Fixed Costs per Employee = fixed costs / number of employees This ratio shows the average amount spent on overhead for each employee in the period. This shows the overhead factor that each employee must carry

Investment Ratios

## 1. Dividend Payout Ratio

Dividend Payout Ratio = annual dividends per share / net income. The dividend payout ratio shows the portion of earnings that are paid out in dividends. A low dividend payout ratio indicates that a large portion of the profits are retained and likely invested for growth.

2. Dividend Yield
Dividend Yield = annual dividends per share / price per share. The dividend yield is the yield a company pays out to its shareholders in terms of dividends.

## 3. Growth Rate in Earnings per Share (EPS) Ratio

Earnings per Share (EPS) Growth Rate = (EPS at end of period - EPS at beginning of period) / EPS at beginning of period

The earnings per share growth rate indicate the amount of growth for investors. This ratio helps determine the multiplier used in calculating the company's market value. A higher ratio yields a higher multiplier. The trend in this ratio indicates whether growth is steady , sporadic, accelerating or declining.

## 4. Price Earning Ratio - P/E Ratio

Price Earnings (P/E) Ratio = market price per share / Earnings per share.

A decrease in the price earnings ratio (P/E ratio) may indicate a lack of confidence in the company's ability to maintain earnings growth.

Dividend Ratios
1. Cash Dividend Coverage Ratio
Cash Dividend Coverage = (cash flow from operations) / dividends. The cash dividend coverage ratio reflects the company's ability to meet dividends from operating cash flow. A cash dividend coverage ratio of less than 1:1 (100 %) indicates that dividends are draining more cash from the business than it is generating.

## 2. Dividend Payout Ratio

Dividend Payout Ratio = annual dividends per share / net income. The dividend payout ratio shows the portion of earnings that are paid out in dividends. A low dividend payout ratio indicates that a large portion of the profits are retained and likely invested for growth.

3. Dividend Yield
Dividend Yield = annual dividends per share / price per share. The dividend yield is the yield a company pays out to its shareholders in terms of dividends.

## Other Accounting Ratios

1. Advertising to Sales Ratio
Advertising to Sales Ratio = advertising costs / sales Advertising to Sales Ratio = 1/ sales to advertising ratio The advertising to sales ratio calculates the extent to which advertising is a cost of sales. It is the inverse of the sales to advertising ratio of return on advertising.

A ratio above 0.1:1 (10%) is of concern because it indicates that advertising is not generating over 10 times its cost in sales

2. Altman z-score
Z-score = 1.2 a + 1.4 b + 3.3 c + d+.6 f E Where: a = working capital, b = retained earnings, c = operating income, d = sales, e = total assets, f = net worth and g = total debt The Altman z-score is a bankruptcy prediction calculation. The z-score measures the probability of insolvency (inability to pay debts as they become due). 1.8 Or less indicates a very high probability of insolvency. 1.8 to 2.7 indicates a high probability of insolvency. 2.7 to 3.0 indicate possible insolvency. 3.0 Or higher indicates that insolvency is not likely. g

3. Audit Ratio
Audit Ratio = audit costs / sales

A high audit ratio indicates that more audit time was required because of problems with the company's accounting records or control procedures.

## 4. Growth Rate in Retained Earnings Ratio

Retained Earnings Growth Rate = (net income - dividends) / common shareholders' equity A lower retained earnings growth ratio reflects the company's inability to generate internal funds.

## 5. Interest Cost of Inventory

Interest Cost of Inventory = inventory x interest rate The interest cost of inventory reflects the interest associated with holding inventory. Insurance, storage, theft and obsolescence costs must be added to the interest cost of inventory when determining the total inventory holding costs.

## 6. Ratio of Overhead to Direct Labor Costs

Overhead to Total Labor = fixed costs/ variable (direct) Labor) costs The overhead to direct Labor ratio shows the overhead factor per direct Labor dollar.

## 7. Ratio of Overhead to Variable Costs

Overhead to Variable Costs = fixed costs / variable costs This ratio shows the overhead factor per variable dollar cost.

## 8. Quality Ratio / Product Quality Ratio

Quality Ratio = 1 - (sales returns and allowances / sales). The quality ratio, or product quality ratio, indicates the extent of acceptance (in dollar terms) of the product or services sold. The analyst should look to see whether the quality is increasing or decreasing. A decrease in the quality ratio indicates declining product quality, which may lead to decreasing sales or profit margins

THE END