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Financial Ratios Formula

This document outlines various financial ratios used to analyze a company's liquidity, solvency, profitability, market performance, short-term and long-term financial position. It provides the formulas and calculations for current ratio, acid test ratio, receivables turnover, inventory turnover, operating cycle, times interest earned, debt-equity ratio, return on sales, return on assets, working capital to total assets, fixed assets to total equity and more. These ratios are categorized into liquidity ratios, tests of solvency, tests of profitability, market tests, tests of overall short-term solvency, and ratios used to evaluate long-term financial position or stability.

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547 views2 pages

Financial Ratios Formula

This document outlines various financial ratios used to analyze a company's liquidity, solvency, profitability, market performance, short-term and long-term financial position. It provides the formulas and calculations for current ratio, acid test ratio, receivables turnover, inventory turnover, operating cycle, times interest earned, debt-equity ratio, return on sales, return on assets, working capital to total assets, fixed assets to total equity and more. These ratios are categorized into liquidity ratios, tests of solvency, tests of profitability, market tests, tests of overall short-term solvency, and ratios used to evaluate long-term financial position or stability.

Uploaded by

Althea Acidre
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Ratio Formula Comments

A. LIQUIDITY RATIOS: Refers to the company’s ability to pay


its short-term current liabilities as
they fall due
1. Current Ratio Current Assets / Current Liabilities Measures the number of times that
the current liabilities could be paid
with the available current assets
2. Acid Test Ratio Quick Assets / Current Liabilities Measures the number of times that
the current liabilities could be paid
with the available cash and near cash
assets.
3. Working Capital Activity Ratios Indicates how long a firm expects to
(Turnovers): realize cash or when the firm should
pay its various current liabilities
a. Receivable Turnover Net Credit Sales or Net Sales / Time required to complete one
Average Receivables collection cycle-from the time
receivables are recorded, then
collected, to the time new receivables
are recorded again.
b. Average Age of Receivables No. of working days in a year / Indicates the average number of days
Receivables turnover during which the company must wait
before receivables are collected.
c. Inventory Turnover Cost of goods sold / Average Mdse. Measures the number of times that
(merchandising firm) Inventory inventory is replaced during the
period.
d. Average Age of Inventory No. of working days / Inventory Indicates the average number of days
(merchandising) Turnover during which the com[any must wait
before inventories are sold.
e. Operating Cycle Ave. Age of Receivables + Ave. Age
of Inventory
f. Raw Materials Turnover Cost of Materials Used / Ave. Raw
(manufacturing) Mat. Inventory
g. Goods in Process Turnover Cost of Goods Manufactured / Ave.
Goods in Process Invty.
h. Finished Goods Turnover Cost of Goods sold / Ave. finished
goods invty.
i. Average Age (manufacturing) No. of Working Days / Turnover
j. Operating Cycle Sum of ave. ages of receivables, raw
materials, goods in process and
finished goods inventories
k. Trade Payables Turnover Net Credit Purchases / Ave. Trade
Payables
l. Ave,. Age of Trade Payables No. of working days / Payables Indicates the length of time during
turnover which payables remain unpaid.
m. Current Assets Turnover Cost of sales + OE (excluding Measure the movement and
depreciation and amortization) / Ave. utilization of current assets to meet
Current Assets operating requirements.
B. TEST OF SOLVENCY ( Or Refers to the company’s ability to pay
Leverage Ratios or Financing all its debts, whether such liabilities
Ratios) are current or noncurrent
1. Times Interest Earned Income before tax + Interest Expense Determine the extent to which
/ Interest Expense operations cover interest expense
2. Debt-Equity Ratio Total Liabilities / Total owner’s or Proportion of assets provided by
Stockholder’s Equity creditors compared to that provided
by owners.
3. Debt Ratio Total Liabilities / Total Assets Proportion of total assets provided by
creditors
4. Equity Ratio Total Owner’s or Stockholders’ Equity Proportion of total assets provided by
/ Total Assets owners
C. TESTS OF
PROFITABILITY
1. Return on Sales Net Income / Net Sales Determines the amount of income
earned on each peso sales
2. Gross Profit Ratio Gross profit / Net Sales

3. Return on Assets (ROA) Net Income / Average Total Assets Efficiency with which assets are used
to operate the business

4. Return on Owner’s Equity Net Income / Ave. Owner’s Equity Measures the amount earned on the
owner’s or stockholders’ investment

5. Earnings Per Share Net Income – Pref. Dividends / Measures the amount of net income
Weighted Ave. No. of Common earned by each common share
Shares
D. MARKET TESTS ( Or Indicate the stock’s performance or
Growth Ratios) attractiveness in the market
1. Price-Earnings Ratio (P/E) Price per share / EPS Indicates the number of pesos
required to buy P1 of earnings
2. Dividend Yield Dividend per share / Price per share Measures the rate of return in the
investor’s common stock investment
3. Dividend Pay-out Common Div. Per Share / EPS Indicates the proportion of earnings
distributed as dividends
E. TESTS OF OVERALL
SHORT-TERM SOLVENCY
OR SHORT-TERM
FINANCIAL POSITION
1. Working Capital to Total Asset Working Capital / Total Assets Indicates relating liquidity of total
assets and distribution of resources
employed
2. Working Capital Turnover Net Sales / Ave. Working Capital Indicates adequacy and activity of
working capital
3. Fixed Assets to Long-Term Liab. Fixed Assets / Long-Term Liabilities Reflects extent of the utilization of
resources from long-term debt.
Indicative of sources of additional
funds.
F. RATIOS USED TO
EVALUTE LONG-TERM
FINANCIAL POSITION OR
STABILITY
1. Fixed Assets to Total Equity Fixed Assets / Total Equity Measures the proportion of owners’
equity to fixed assets. Indicative of
over or under investment by owners;
also weakness in “trading on the
equity”
2. Fixed Assets to Total Assets Fixed Assets (net) / Total Assets Indicates possible over-expansions of
plant and equipment
3. Sales to Fixed Assets (Plant Net Sales / Fixed Assets (net) Tests roughly the efficiency of
Turnover) management in keeping plant
properties employed
4. BV Per Share of C/S Common Stock Equity / No. of Measures recoverable amount in the
outstanding shares of C/S event on liquidation if assets are
realized at their book value

5. Times Preferred Dividends Net Income After Taxes / Preferred Indicates ability to provide dividend to
Requirements Requirements preferred stockholders

G. RATIOS INDICATIVE OF
INCOME POSITION
1. Rate of return on Ave. Current Net Income / Ave. Current Assets Measures the profitability of current
Asset assets invested
2. Rate of Return Per Turnover of Rate of Return on Ave. CA / CA Shows profitability of each turnover of
Current Assets Turnover current assets

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