8/6/2019 Financial Ratios Notes

1/8

Financial Ratios

1) Liquidity ratios

2) Asset turnover ratios

3) Financial leverage ratios

4) Profitability ratios

5) Dividend policy ratios

Liquidity ratios

Current ratio = Current assets

Current liabilities

Quick ratio = Current assets - Inventory

Current liabilities

Cash ratio = Cash + Marketable securitiesCurrent liabilities

Net working capital to sale ratio = Current assets - Current liabilities

Sales

Working capital = Current assets-Current liabilities

Assets turnover ratios

Account receivable turnover (in times) = Annual credit sales

Account receivable

8/6/2019 Financial Ratios Notes

2/8

Average collection period = Account receivable

Annual credit sales /365

Account receivable turnover (in days) = 365

Receivable turnover

Account payable turnover (in times) = Annual credit purchases

Account payable

Average payment period = Account payable

Annual credit purchases /365

Account payable turnover (in days) = 365

Payable turnover

Inventory turnover (in times) = Cost of goods sold

Average inventory

Inventory period = Average inventory

Annual C G S /365

Inventory turnover (in days) = 365

Inventory turnover

8/6/2019 Financial Ratios Notes

3/8

Total asset turnover = Sales

Total assets

Fixed asset turnover = Sales

Total fixed assets

Operating Cycle = (ITD+RTD)

Cash convrsion cycle = (ITD+RTD)-PTD

ITD = Inventory turnover in days

RTD= Receivable turnover in days

PTD= Payable turnover in days

Financial leverage ratios

Total capitalization ratio = Long term debt

Total capitalization

Total capitalization = Long term debt+Equity

Debt ratio= Total liabilities

Total assets

Debt-to- total assets ratio = Total debt

Total assets

Long term debt ratio = Long term debt

Total assets

8/6/2019 Financial Ratios Notes

4/8

Debt-to-equity ratio = Total debt

Shareholders equity

Interest coverage = Earning before interest & taxesInterest charges

Equity multiplier = Total assets

Shareholder equity

or 1+Debt to equity ratio

Fixed charge coverage ratio = Earning before interest & taxes + lease payment

Interest+leasepayment

Profitability ratios

Gross profit margin = Sales cost of goods sold or Gross income

Sales Sales

Operating profit margin = Operating Profit

Sales

Net profit maegin = Net profit after tax

Or Sales profitability Sales

Return on assetsor Investment

or Asset earning power = Net profit after tax

Total assets

8/6/2019 Financial Ratios Notes

5/8

Return on equity

or Shareholder equity

or Equity earning power = Net profit after tax

Shareholder equity

Return on capital = R O E / (1+Debt to equity ratio)

ROI = (Net Profit After Taxes Sales) x (Sales Total Assets)

8/6/2019 Financial Ratios Notes

6/8

8/6/2019 Financial Ratios Notes

7/8

8/6/2019 Financial Ratios Notes

8/8

ROE = (Profit margin)*(Asset turnover)*(Equity multiplier) = (Net

profit/Sales)*(Sales/Assets)*(Assets/Equity)

Dividend policy ratios

Dividend yield = Dividend per share

Share price

Dividend pay out ratio = Dividend per share

Earning per share

Earning per share = Net income available to shareholders

Numbers of shares outstanding

Dividend per share = Dividend paid to shareholders

Number of shares outstanding

Price earning ratio = Market price per share

Earning per share

Note. Purcases= Cost of goods sold+Ending inventory-Beginning inventory

http://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Saleshttp://en.wikipedia.org/wiki/Saleshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Saleshttp://en.wikipedia.org/wiki/Saleshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Shareholders'_equity