Accounting Formulas

Cash Holding Ratio

(Cash + Cash Equivalents) / Total Assets

• amount of cash a company is holding compared to its assets

• more cash provides flexibility, more liquid, but too much comes

Average Days in Inventory

365/Inventory Turnover Ratio

• lower is better

Gross Profit Ratio

Gross Profit/Net Sales

• amount price of inventory exceeds cost

• higher is better

Return on Assets

Profit Margin x Asset turnover

Net Income/Average Total Assets

• higher is better

• amount of net income generated for each dollar invested in assets

Investments to Assets Ratio

Total Investments/Total Assets

• having lots of investments can be good or bad

Asset Turnover

Net Sales/Average Total Assets

• higher is better

Profit Margin

Net Income/Net Sales

• higher is more profitable and better

• earning per dollar of sales

Price Earnings Ratio

Share price/earnings per share

• higher is better

Inventory Turnover Ratio

COGS/Average Inventory

• higher is better

Return on Investments Ratio (ROI)

Investment Related Income (Loss) / (Average short term investments + Average long term investments)

• higher is better

Working Capital

Current Assets - Current Liabilities

Current Ratio

Current Assets / Current Liabilities

• the higher the current ratio, the greater the company’s liquidity

Debt to Assets Ratio

Total Debt/Total Assets

• the lower the debt to assets ratio the greater the company’s solvency

Times interest earned

Net Income + Interest Expense + Tax Expense / Interest expense

Return on Equity

Profit margin x Asset Turnover x Equity Multiplier

Net Income/Average Total Equity

Equity Multiplier

Average Total Assets/Average Total Equity

Dividend Yield

Dividends Per Share / Stock Price

Earnings Per Share

Net Income - Dividends on Preferred Stock / Weighted-Average Number of Shares Outstanding

• higher is better

• company’s profitability

Debt to Equity Ratio

Total Interest-Bearing Debt / Stockholders’ Equity

• higher the debt to equity ratio the higher the risk of bankruptcy

• solvency: refers to the company’s ability to make interest payments and pay back its debts as they become due

Acid Test Ratio

Cash + Current Investments + Accounts Receivable / Current Liabilities

• excludes inventory and prepaid rent

Vertical Analysis

Expressing each statement in a financial statement as a percentage of the same base amount measured in the same period

• income statement: items expressed as a percentage of sale

• balance sheet: items expressed as a percentage of total assets

allow us to make meaningful comparisons of two different sized companies

Horizontal Analysis

analyzing trends in a financial statement data for a single company over time

%Increase (Decrease)= Current-year amount - Prior-year amount / Prior-year amount

Return on Equity

Net Income / Average Total Equity

Profit Margin x Asset Turnover x Equity Multiplier

• income earned for each dollar in stockholders equity

• relates net income to the investment made by owners of the business

• higher is better

DuPont Framwork

used to analyze the performance of a company as measured by the return on equity ratio

• profitabiloty

• asset efficiency

• financial leverage

Profit Margin

Net Income/Net Sales

• a higher profit margin indicates that a company generates more profit from each dollar of sales

Asset Turnover

Net Sales/Average Total Assets

• a company uses its assets more efficiently to generate sales

Equity Multiplier

Average total assets / Average total equity

• higher means more of the company’s assets have been financed with debt