Ratios

Liquidity Ratios Leverage Ratios Activity Ratios Profitability Ratios

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Key Financial Ratios per Schwab

LIQUIDITY RATIOS Current Ratio = Current Assets/Current Liabilities Quick (Acid Test) Ratio = (Current Assets Inventories)/Current Liabilities Working Capital Percentage = (Current Assets-Current Liabilities)/Net Sales LEVERAGE RATIOS Debt to Assets Ratio = Total Liabilities/Total Assets Debt to Equity Ratio = Total Liabilities/Total Equity Times Interest Earned = Operating Income/Interest Expense ACTIVITY RATIOS Accounts Receivable Turnover = Credit Sales/Accounts Receivable Average Collection Period = (Accounts Receivable x 365)/Net Sales Inventory Turnover = Cost of Goods Sold/Finished Goods Inventory Asset Turnover = Net Sales/Total Assets PROFITABILITY RATIOS Return on Assets = Operating Income/Total Assets Return on Equity = Net Income/Total Equity Net Profit Margin = Net Income/Net Sales
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Income Statement for Petri & Associates Leasing Company for the Year Ending December 31, 2005

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Balance Sheet for Petri & Associates Leasing Company for December 31, 2005

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Liquidity Ratios
Current Ratio Quick or Acid Test Working Capital Percentage

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Can You Pay Your Bills?

LIQUIDITY RATIOS

Current Ratio
Comparing cash and near-cash current assets against the debt (current liabilities) coming due and payable within one year
Current assets Current ratio ! Current liabilities urrent ratio ! $350,000 ! 3.50 $100,000

Industry norm for current ratio = 2.70

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Can You Pay Your Bills? (contd.)

LIQUIDITY RATIOS

Acid-Test Ratio (Quick Ratio)

A measure of a companys liquidity that excludes inventories
Acid-t st r ti ! C rr t ss ts - I v t ri s C rr t li biliti s
, - $22 , $1 ,
! .

Acid-t st r ti !

Industry norm for acid-test ratio = 1.55

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Can You Pay Your Bills? (contd.)

LIQUIDITY RATIOS

Working Capital Percentage

A measure of a companys working capital as a percentage of total sales revenue
Working Capital Percentage = (Current Assets Current Liabilities) Net Sales ($350,000 - $100,000) = .294 or 29.4% $850,000

Working Capital Percentage =

Industry norm for working capital percentage = .335

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Leverage Ratios
Debt to Assets Ratio Debt to Equity Ratio Times Interest Earned

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How Much Debt Are You Using?

LEVERAGE RATIOS

To what extent have the firms assets been financed by debt?

Debt/Assets Ratio
The ratio of total debt to total assets
Total Debt Debt/Assets ratio ! Total Assets

$300,000 Debt/Assets ratio ! ! 0.326, or 32.6% $920,000

Industry norm for debt/assets ratio = 40.0%
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How Much Debt Are You Using? (contd)

LEVERAGE RATIOS

How much debt is being used, compared to what the owners have invested in the business?

Debt/Equity Ratio
The ratio of total debt to total equity Total Debt Debt/Equit y ratio ! Total Equity

$300,000 Debt/Equity ratio ! ! 0.484, or 48.4% $620,000

Industry norm for debt/equity ratio = 66.7%
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How Much Debt Are You Using? (contd)

LEVERAGE RATIOS

Times Interest Earned Ratio

The ratio of operating income to interest charges
Times interest earned ! Operating Income Interest Expense

$100,000 Times interest earned ! ! 5.00 $20,000

Industry norm for time interest earned = 4.00

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Activity Ratios Accounts Receivable Turnover Ratio Average Collection Period Inventory Turnover

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Are You Managing the Firm Well?

ACTIVITY RATIOS

Account Receivable Turnover Ratio

The number of times accounts receivable rolls over during a year
ccounts receivable turnover ! Credit sales ccounts receivable

ccounts receivable turnover !

$850,000 ! 10.63 $80,000

Industry norm for accounts receivable turnover = 10.43

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Are You Managing the Firm Well? (contd.)

ACTIVITY RATIOS

Average Collection Period

The average time it takes a firm to collect its accounts receivable
verage Collection Period ! ccounts receivable x 365 Credit Sales ($80,000 x 365) ! 34.35 days $850,000

verage Collection Period !

Industry norm for average collection period = 35 days

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Are You Managing the Firm Well? (contd.)

ACTIVITY RATIOS

Inventory Turnover
The number of times inventories roll over during the year
Cost of goods sold Inventory turnover ! Inventory $550,000 Inventory turnover ! ! 2.50 $220,000
Industry norm for inventory turnover = 4.00

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Profitability Ratios Profit Margin Return on Assets/Return on Investment Return on Equity

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Are You Getting a Good Rate of Return on Each Dollar of Sales?

PROFITABILITY RATIOS

Net Profit Margin

The rate of return that owners earn on each dollar of sales
Net Profit Margin ! Net Income Sales

et ro it

$60,000 argin ! ! 0.07, or 7.0% $850,000

Industry norm for net profit margin = 9.5%

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Are You Making a Good Return on Your Assets?

PROFITABILITY RATIOS

Return on Assets
A measure of operating profits relative to total assets

Industry norm for ROA: 13.20%

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Are You Getting a Good Rate of Return on Your Investment?

PROFITABILITY RATIOS

Return on Equity
The rate of return that owners earn on their investment
Net Income Return on Equity ! Total Equity

$60,000 eturn on Equity ! ! 0.097, or 9.7% $620,000

Industry norm for return on equity = 12.5%

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