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Financial Ratio Analysis and Accounting Formulas

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Financial Ratio Formulas

Current Index: Current Assets / Current Liabilities

Quick Index (Acid Test): (Circulating Active Assets - Inventory) / Current Liabilities

Indebtedness Index: Total Liabilities / Total Assets

Long-term Debt on Assets: Long-term Debt / (Long-term Debt + Equity)

Interest Expense Coverage: (Mean Earnings (ISLR) + Interest Expense) / Interest Expense

Debt Payment Coverage: (ISLR + Earnings After Depreciation) / Long-term Payment

Activity and Profitability Indices

Inventory Turnover: (Amount of Inventory * 365 days) / Cost of Sales

Profitability Metrics

Operating Margin: (Gross Profit Margin * 100) / Net Sales

Sales Margin: (Net Profit * 100) / Sales

Return on Assets (ROA): (Net Profit * 100) / Total Assets

Return on Equity (ROE): (Net Profit * 100) / Heritage (Equity)

Types of Financial Ratios and Definitions

  • 1. Solvency, Circulating, or Working Capital: Shows the company's ability to meet its short-term obligations with its assets. It measures the number of times the business's current assets cover its current liabilities.
  • 2. Liquidity or Acid Test: Shows the company's ability to meet its short-term obligations with its most liquid assets.
  • 3. Indebtedness or Solidity: Measures the portion of assets financed by debts. It calculates the ratio or percentage representing the total debts of the company in relation to resources available to satisfy them.
  • 4. Debt Capital: The relationship within the capital structure between resources provided by third parties and equity. It notes the proportion of liabilities in respect to liquid capital.
  • 5. Total Assets: The relationship within the capital structure between resources provided by shareholders or owners of capital and total assets.
  • 6. Gross Profit Margin on Sales: Reflects the proportion of gross profits obtained in relation to the net sales they produce.
  • 7. Net Profit Margin on Sales: Measures the rate or percentage of net utility analyzed; i.e., it measures the ease of determining net sales value.
  • 8. Operating Expenditures: Measured as the proportion of operating expenses incurred in relation to sales for the period under analysis.

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