Financial Ratio Analysis
Classified in Economy
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Working Capital
Working capital is equal to current assets minus current liabilities.
Liquidity Ratios
Current Ratio
The current ratio is equal to current assets divided by current liabilities.
Quick Ratio (Acid-Test)
The quick ratio (acid-test) is found by dividing the most liquid current assets (cash, marketable securities, and accounts receivable) by current liabilities.
Accounts Receivable Turnover
The accounts receivable turnover is found by dividing net credit sales (if not available, then total sales) by the average accounts receivable.
Average accounts receivable is typically found by adding the beginning accounts receivable to the ending accounts receivable and dividing by 2.
Average Collection Period
The average collection period is found by dividing the accounts receivable turnover into 365 days.
Activity Ratios
Inventory Turnover
Inventory turnover is computed by dividing the cost of goods sold by the average inventory.
Average inventory is determined by adding the beginning and ending inventories and dividing by 2.
Average Age of Inventory
Average age of inventory is computed by dividing 365 days by the turnover rate.
Total Asset Turnover
Total asset turnover is sales divided by total assets.
Profitability Ratios
Times Interest Earned Ratio
Times interest earned ratio is found by dividing income before interest and taxes by interest expense.
Return on Total Assets
Return on total assets is found by dividing the sum of the net income and the interest expense adjusted for the tax rate by the average total assets.
Return on Total Equity
Return on total equity is found by dividing the net income by the average stockholders’ equity.
Earnings Per Share
Earnings per share are equal to net income divided by common shares outstanding.
Price Earnings Ratio
Price earnings ratio is equal to the market price per share of stock divided by the earnings per share.
Dividend Yield
The dividend yield of a stock is the dividends per share divided by the market price per share.
Dividend Payout
Dividend payout is equal to the dividends per share divided by the earnings per share.
Book Value Per Share
Book value per share is net assets available to common stockholders divided by shares outstanding, where net assets is stockholders’ equity minus preferred stock.
Profit Margin
The ratio of net income to net sales is termed the profit margin.
Solvency Ratios
Debt-to-Equity Ratio
Debt-to-equity ratio: total liabilities to stockholders’ equity.