Ratio analysis

Liquidity Ratios

Measures short-term ability of the company to pay its maturign obligations antd to meet unexpected needs for cash

Profitability

Measures the income or operating success of a company for a given period of time

Solvency

Measures the ability of the company to survive over a long period of time

Intracompany Comparisons

comparing a company to itself from year to year

industry average

comparing a company to median ratios of all companies in industry

intercompany comparison

comparing across companies

Current Ratio

Liquidity

current assets/current liabilities

A ratio of 1 or more is generally seen as a positive sign, indicating that a company has enough current assets to cover its current liabilities. 

An ideal range can vary significantly by industry, but a ratio between 1.5 and 3 is often considered acceptable. 

ACID Test (quick) ratio

Liquidity

(Cash+ short term investments + accounts receivable (net))/current liabilities

>1 shows ability to cover short-term debt without relying on inventory. Low ratio may mean liquidity problems.

Accounts receivable (net)

Gross Accounts Receivable - Allowance for Doubtful Accounts - Sales Returns and Allowances = Net Accounts Receivable

Accounts Receivable Turnover

Liquidity

Net Credit Sales/Average net accounts receivable

Times

Speed of collections. Higher = faster, but too high may mean strict credit policies

Net Credit Sales

Gross Credit Sales - Sales Returns - Sales Allowances - Sales Discounts

Inventory Turnover

liquidity

COGS/Avg inventory

Times

Higher = faster sales, efficient inventory use. Lower = risk of overstocking or obsolescence.

Profit Margin

profitability

Net Income/Net Sales

%

Higher margin means more sales converted into profit. Low margin means costs are eating into sales.

Asset Turnover

Profitability

Net Sales/Average total assets

times

Shows how many dollars of sales generated per $1 of assets. Higher = more efficient use of assets.

Return on common SE

Profitability

(Net income - preferred dividends)/average common SE

%

Measures return to shareholders. High ROE shows effective use of equity; very high may also mean high leverage.

Earnings Per Share (EPS)

Profitability

(Net income - preferred dividends)/weighted average common shares outstanding

$

Measures profit per share. Higher EPS = more valuable to investors

Price Earnings (P.E) Ratio

profitability

Market Price per share of stock / earnings per share

times

Shows how much investors are willing to pay per $1 of earnings. High = growth expectations, low = undervalued or weak growth.

Payout ratio

profitability

Cash dividends/net income

%

Shows % of earnings paid as dividends. High = income focus, low = reinvestment.

Debt to assets

solvency

debt/assets

%

% of assets financed by debt. Higher = more risk; lower = more conservative.

Times interest Earned

solvency

Income before taxes and interest expense/ interest expense

Ability to pay interest. Higher = safer. <2 is concerning

Return on Assets

Profitability

Net income/average total assets

%

Profit earned per dollar of assets. Measures asset efficiency

COGS

• BeginningInventory+Purchases−EndingInventory

• NetSales−GrossProfit