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Financial Ratio’s Explained

Income Statement Ratio’s

Ratio

Formula

Description

1

Gross Profit Margin

(Revenues – COGS) / Revenues

It is a profitability ratio that indicates the percentages of remaining revenues after deducting the cost of goods sold.

2

Operating Profit Margin

Operating Profit / Revenues

This ratio analyzes the company’s profitability at its operating level.

3

Net Profit Margin

Net Profit / Revenues

This ratio analyzes the company’s profitability after deducting all costs and expenses in the business.

4

Return on Assets

Net Profit / Average Assets

This ratio measures the company’s ability in generating profit from its assets.

5

Return on Equity

Net Profit / Average Equity

This ratio measures the company’s ability in generating profit from its equity.

6

Assets Turnover

Sales / Average Assets

This ratio measures the company’s performance in utilizing its assets to generate sales.

7

Interest Coverage Ratio

Earnings before Interest and Tax / Interest Expenses

This ratio analyzes the company’s ability to pay interest to its creditors.

8

9

Earnings Per Share

Price-Earnings Ratio

8.(Net Profit – Preferred Dividends) / Common Shares

9.Market Value per Share / Earnings per Share

8. This ratio analyzes the company’s ability to generate profit to its common shareholders.

9. This ratio analyzes the relationship between the company’s share price and its earnings per share.


Balance Sheet Ration’s

Ratio

Formula

Decription

1

Current Ratio

Current Assets / Current Liabilities

This ratio analyzes the company’s liquidity by using its current asset to pay the current liability.

2

Quick Ratio

(Current Assets – Inventory) / Current Liabilities

This ratio analyzes the company’s liquidity by using its current asset which excludes inventory to pay the current liability. This is due to the inventory may take some time to convert to cash.

3

Cash Ratio

Cash and Cash Equivalent / Current Liabilities

This ratio analyzes the company’s ability to pay its short-term liability in the stress situation where its inventory won’t sell and its receivables won’t be able to be collected in a short period of time.

4

Receivables Turnover

Net Credit Sales / Average Receivables

This ratio measures how fast the company can collect payment from its receivables.

5

Days Sales Outstanding

(Receivables / Credit Sales) x 365

This ratio measures how long the company takes in days to collect payment from its receivables after the sales have been made

6

Doubtful Account

Allowance for Doubtful Accounts / Receivables

This ratio analyzes the quality of the company’s receivables. It is usually used by auditors in the examination of receivables.

7

Inventory Turnover

Cost of Goods Sold / Inventory

This ratio measures how many times the company sold and replaced its inventory during the period

8

Days Inventory Outstanding

(Inventory / Cost of Goods Sold) x 365

This ratio measures how long the company takes in days to sell its inventory.

9

Payables Turnover

Purchases / Average Payables

This ratio measures how many times the company pays its payables during the period.

10

Days Payable Outstanding

(Payables / Cost of Goods Sold) x 365

This ratio measures how long the company takes in days to pay back its payables.

11

Debt-to-equity Ratio

Liabilities / Equity

This ratio analyzes the company’s financial leverage which indicates how much debt the company uses comparing to its equity in running the business.

12

Debt-to-asset Ratio

Liabilities / Assets

This ratio analyzes the company’s financial leverage which indicates how much debt the company uses comparing to its total assets.