Thursday, March 27, 2008

Financial Ratios

Financial Ratios

This is a collection of important financial ratios you will need to know in the future. It is not necessary for the interviews, but will be needed when you are on the job. I will work on putting this together into a Google Doc so you can just print of this chart. I will let you all know once I have done this.

Keep working hard at finding a job or internship. Please let me know when you land something so we can start posting it online.


Ratio Name



Measures of Activity
Accounts ReceivableNet Credit Sales / Avg. Net A/RNet credit sales = gross credit sales - sales returns + sales discounts. This ratio is used to determine how quickly cash is received from customers. A high ratio means that A/R is being turned over quickly. This is only good if a company makes credit sales.
Avg. Collection Period365 / A/R Turnover
Inventory TurnoverCOGS / Avg. InventoryHow many times during the period that a company completed the purchasing cycle. (From the purchase of inventory to sale) A higher ratio means inventory turns over more times or sells faster. Extremely high isn't good. That means there isn't enough merchandise on hand
Avg. Selling Period365 Days / Inventory Turnover
Payables TurnoverTotal Cash Expenses / Avg. Current Liabilities (Except Bank Loans)This is a means to assess how well management is managing payments for operating expenses. It represents the number of times the payables turned over during the year. From purchase of goods to the payment of invoices. If it is too low, it means that the company might be paying too slow, missing out on discounts or hurting credit. If it is too high, it may indicate the company isn't taking advantage of credit opportunities.
Payment Period365 Days / Payables TurnoverMeasures the average number of days required to pay the average amount of current operating liabilities.
Asset TurnoverNet Sales / Avg. Total AssetsMeasures the profitability as it relates to a firm's ability to generate sales to the amount of assets that the firm employs. The higher the better. This ratio needs to be compared to others in the industry for precise analysis.
Current RatioCurrent Assets / Current LiabilitiesMeasure of the current adequacy of company's current assets to meet its current obligations. It must be greater than 1. If it is less than 1, liabilities exceed current assets. For every $1 of liabilities, the company has a ratio amount of current assets available.
Cash Flow Per Share(Cash Flow From Operations - Preferred Dividends) / Weighted Avg. # Common Stock Shares
Quick Ratio(Cash + Temporary Investments + A/R) / Current LiabilitiesMeasure of a company's ability to meet their current debt obligations aka "Acid Test Ratio." More reliable test of liquidity than the current ratio b/c it eliminates inventory which is a larger asset. It should be greater than 1 depending on the industry. It should be improving, compare to the industry. It is used as a benchmark for liquidity. Lenders like a strong Quick Ratio.
Long-Term Debt Paying Ability
Times Interest EarnedMeasures a firm's ability to service its debt by comparing earnings before deducting interest and taxes to the amount of interest expense for the period. It shows how many times a company could pay its interest costs with operating income. The higher the better.
Debt-to-EquityTotal Liabilities / Total Shareholders EquityMeasures the relationship between the amount of debt and the amount of owners equity used to finance the firm. The larger the ratio, the greater amount of debt used to finance the firm and therefore the greater the risk. 1 means that equal amounts of debt and equity are used. Less than or equal to 1 is the best.
Gross Margin RatioGross Margin / Net SalesMeasures in percentage terms, that portion of sales revenue available after deducting the costs of goods sold. It must be large enough to ensure that selling prices can cover operating expenses and provide a satisfactory income.
Return on SalesNet Income / Net SalesMeasures the portion of sales revenue remaining after deducting all operating expenses. It indicates the business's overall profitability. (If Income from continuing operations isn't shown on the Income Statement, deduct any non-operating income and add all non-operating expenses.) Compare with past ratios, it should be high.
Return on AssetsNet Income / Avg. Total AssetsIncludes the 2 fundamental profitability elements: earnings and investment assets. It represents the ratio of net income to total assets and it measures the effectiveness of management in utilizing the resources at its command. The higher the better. Compare with the industry.
Return on Owners' EquityNet Income / Avg. Owners' EquityMeasures the return earned (Net Income) relative to the portion of the firm that belongs to the owners. The higher the better. Compare with the industry.
Return on Common Equity(Net Income - Preferred Stock Dividends) / (Stockholders Equity - Liquidation Value of Preferred Stock)Computed generally for the common stockholders. If there is preferred stock outstanding then there needs to be adjustments. High is good.
DuPont ROINet Income / Avg. Total Assets or Asset Turnover * Return on SalesA measure that is a combination of return on sales, a profitability measure, and the asset turnover ratio. High is good. Compare to the industry.
Earning Per Share (EPS)(Net Income - Preferred Dividends) / Weighted Avg. # Common Stock Shares Outstanding
Dividend Payout RatioDividends Paid to Common Stockholders / Earnings Available to Common StockholdersReveals a firm's dividend payment philosophy. Relates the amount of dividends paid to the periods earnings. Shows how the portion of the firm's assets are distributed to the common stockholders as well as the remaining portion of earnings that are reinvested in the firm.
Price-to-Earnings RatioCurrent Market Price / EPS
Dividend YieldDividends Paid Per Share of Stock / Market Price Per ShareMeasures the return that an investor would receive on a company's stock at the current price, if dividends paid in the recent past continue in the foreseeable future.


Anonymous said...

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Keep up the great site!!!

zahid khan jadoon said...

Very informative and useful, you showed very useful info about Important List financial ratios Formulas. Great and to the point work.

Khurram shahzad said...

Very Informative and useful... Keep it up the great work.