financial ratios

Liquidity Ratios

Measure the ability to pay short-term obligations.

1. Current Ratio

Formula: Current Ratio=Current AssetsCurrent LiabilitiesCurrent\ Ratio = \frac{Current\ Assets}{Current\ Liabilities}
Measures: Ability to cover short-term debts.

2. Acid-Test (Quick) Ratio

Formula: Quick Ratio=Cash+Short-Term Investments+ReceivablesCurrent LiabilitiesQuick\ Ratio = \frac{Cash + Short\text{-}Term\ Investments + Receivables}{Current\ Liabilities}
Measures: Immediate liquidity, excluding inventory.

3. Accounts Receivable Turnover

Formula: AR Turnover=Net Credit SalesAverage Accounts ReceivableAR\ Turnover = \frac{Net\ Credit\ Sales}{Average\ Accounts\ Receivable}
Measures: How many times receivables are collected. Average Collection Period: 365AR Turnover\frac{365}{AR\ Turnover}

4. Inventory Turnover

Formula: Inventory Turnover=Cost of Goods SoldAverage InventoryInventory\ Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}
Measures: How many times inventory is sold. Days in Inventory: 365Inventory Turnover\frac{365}{Inventory\ Turnover}

Profitability Ratios

Measure income, efficiency, and returns.

5. Profit Margin

Formula: Profit Margin=Net IncomeNet SalesProfit\ Margin = \frac{Net\ Income}{Net\ Sales}
Measures: Percent of sales that becomes profit.

6. Asset Turnover

Formula: Asset Turnover=Net SalesAverage Total AssetsAsset\ Turnover = \frac{Net\ Sales}{Average\ Total\ Assets}
Measures: How efficiently assets generate sales.

7. Return on Assets (ROA)

Formula: ROA=Net IncomeAverage Total AssetsROA = \frac{Net\ Income}{Average\ Total\ Assets}
Measures: Overall profitability of assets.

8. Return on Ordinary Shareholders' Equity (ROE)

Formula: ROE=Net IncomeAverage Shareholders′ EquityROE = \frac{Net\ Income}{Average\ Shareholders'\ Equity}
Measures: Return earned on owners’ investment.

9. Earnings Per Share (EPS)

Formula: EPS=Net Income−Preferred DividendsWeighted Average Ordinary SharesEPS = \frac{Net\ Income - Preferred\ Dividends}{Weighted\ Average\ Ordinary\ Shares}
Measures: Income earned per ordinary share.

10. Price-Earnings (P/E) Ratio

Formula: P/E Ratio=Market Price per ShareEarnings per ShareP/E\ Ratio = \frac{Market\ Price\ per\ Share}{Earnings\ per\ Share}
Measures: Market expectations of future earnings.

11. Payout Ratio

Formula: Payout Ratio=Cash DividendsNet IncomePayout\ Ratio = \frac{Cash\ Dividends}{Net\ Income}
Measures: % of earnings paid out as dividends.

Solvency Ratios

Measure long-term survival and debt-payback ability.

12. Debt to Total Assets Ratio

Formula: Debt to Assets=Total LiabilitiesTotal AssetsDebt\ to\ Assets = \frac{Total\ Liabilities}{Total\ Assets}
Measures: Portion of assets financed by creditors.

13. Times Interest Earned

Formula: Times Interest Earned=Income Before Interest and Taxes (EBIT)Interest ExpenseTimes\ Interest\ Earned = \frac{Income\ Before\ Interest\ and\ Taxes\ (EBIT)}{Interest\ Expense}
Measures: Ability to meet interest payments.

Horizontal Analysis

Also known as trend analysis, used to evaluate financial statements over a period of time, account by account.

Formula: CurrentYear−PreviousYearPreviousYear\frac{CurrentYear{ - }PreviousYear}{Previous{}Year}

Vertical Analysis

Also known as common-size analysis, used to express each financial statement item as a percentage of a base amount.

Base Amounts:

  • If analyzing assets, the base amount is Total Assets.

  • If analyzing liabilities and equity, the base amount is Total Liabilities and Equity.

  • If analyzing the income statement, the base amount is Net Sales.

Formula: SpecificAmountBaseAmount\frac{Specific{ }Amount}{BaseAmount}

Profitability Analysis based on Net Income:

  • Profitability can be assessed by comparing the current year's Net Income to the previous year's Net Income.