Financial Ratios Reviewer - Measures the time from inventory

purchase to receiving cash from sales.

1. Liquidity Ratios  Total Asset Turnover
Liquidity measures how quickly an asset Formula:
can be converted into cash. Total Asset Turnover = Net Sales / Average
 Current Ratio Total Assets
Formula: - Measures how efficiently total assets
Current Ratio = Current Assets / Current generate sales.
Liabilities
- Measures short-term debt-paying ability. 3. Debt Management Ratios
- A declining ratio may indicate financial These ratios show how well a company
trouble or improved efficiency. manages its debts.
- An improving ratio may indicate  Times Interest Earned Ratio (TIER)
stockpiling inventory or financial stability. Formula:
 Acid-Test (Quick) Ratio TIER = Net Operating Income (EBIT) /
Formula: Interest Expense
Quick Ratio = (Current Assets - Inventory - - Measures a company’s ability to cover
Prepaid Expenses) / Current Liabilities interest payments.
- A stricter test of short-term financial  Debt-to-Equity Ratio
health. Formula:
- Excludes inventory and prepaid expenses D/E Ratio = Total Debt / Total Equity
to assess liquidity more accurately. - Shows the proportion of debt financing
compared to equity.
2. Asset Management Ratios  Equity Multiplier
These ratios show how efficiently a Formula:
company uses its assets. Equity Multiplier = Total Assets / Total
 Accounts Receivable Turnover Equity
Formula: - Indicates the portion of assets financed by
AR Turnover = Net Credit Sales / Average equity.
Accounts Receivable
- Measures how quickly a company collects 4. Profitability Ratios
money from customers. These ratios assess a company’s ability to
 Average Collection Period generate profit.
Formula:
Average Collection Period = 365 / AR  Gross Margin Percentage
Turnover Formula:
- Shows the number of days it takes to Gross Margin % = (Gross Profit / Net Sales)
collect receivables. × 100
 Inventory Turnover - Focuses on the impact of Cost of Goods
Formula: Sold (COGS) on profitability.
Inventory Turnover = Cost of Goods Sold  Net Profit Margin Percentage
(COGS) / Average Inventory Formula:
- Indicates how many times inventory is Net Profit Margin % = (Net Income / Net
sold and replaced. Sales) × 100
 Average Sale Period - Shows how much of each sales dollar
Formula: remains as profit.
Average Sale Period = 365 / Inventory  Return on Total Assets (ROA)
Turnover Formula:
- Shows how long, on average, inventory ROA = (Net Income / Average Total Assets)
sits before being sold. × 100
 Operating Cycle - Measures how effectively assets generate
Formula: profit.
Operating Cycle = Average Collection  Return on Equity (ROE)
Period + Average Sale Period Formula:
ROE = (Net Income / Average Shareholder Liabilities
Equity) × 100 Cash Cash & Cash Measures the
- Shows how much profit is generated from Current Equivalents / proportion of
shareholders’ investments. Asset Total Current cash and cash
to Total Assets equivalents in
5. Market Performance Ratios Assets the company’s
These ratios assess how well a company total assets.
performs in the stock market. Ratios Used to Gauge Asset
 Earnings per Share (EPS) Management Efficiency and Liquidity
Formula: Ratio Formula Significanc
EPS = (Net Income - Preferred Dividends) / e
Average Outstanding Shares Receivable Net Sales or Shows the
- Measures profitability per share of Turnover Net Credit efficiency of
common stock. Sales / the company
 Price-Earnings Ratio (P/E Ratio) Average in collecting
Formula: Receivables receivables.
P/E Ratio = Market Price per Share / Average (365 Days Indicates
Earnings per Share Collection or 12 how long it
- Shows how much investors are willing to Period Months) / takes to
pay per dollar of earnings. Receivable collect
 Dividend Payout Ratio (DPR) Turnover receivables.
Formula: Merchandi Cost of Reflects how
DPR = (Dividends per Share / Earnings per se Goods quickly
Share) × 100 Turnover Sold / inventory is
- Measures the percentage of earnings paid Average sold and
as dividends. Inventory replaced.
 Dividend Yield Ratio Ratios Used to Gauge Firm’s
Formula: Profitability and Return to Owners
Dividend Yield = (Dividends per Share / Ratio Formula Significance
Market Price per Share) × 100 Rate of Net Measures net
- Shows the return investors get from Return on Income / income as a
dividends. Sales or Net Sales percentage of
 Book Value per Share (BVPS) Net Profit sales.
Formula: Ratio
BVPS = (Total Equity - Preferred Equity) / Return on Net Evaluates
Total Outstanding Shares Total Income / profitability
- Represents the value of a company per Assets Average relative to total
share if liquidated. (ROA) Total assets.
Assets
Financial Ratio Analysis
Asset Net Shows how
Ratios Used to Gauge Company
Turnover Sales / efficiently
Liquidity or Short-term Solvency
Average assets are used
Ratio Formula Significance Total to generate
Current Current Signifies the Assets revenue.
Ratio Assets / firm’s capacity Gross Gross Indicates the
Current to pay current Profit Profit / percentage of
Liabilities liabilities using Ratio Net Sales sales revenue
short-term remaining after
assets. covering the
Quick (Current A stricter test of cost of goods
Ratio Assets - liquidity, sold.
Inventory - considering only Operating Operating Measures the
Prepaid the most liquid Ratio Income / proportion of
Expenses) / assets. Net Sales net sales
Current needed to cover
 operating costs.
Du Pont System of Analysis
The Du Pont system is a method used to
analyze financial performance by breaking
down return on equity into different
components.
Du Pont Formulas:
 Return on Assets = Profit Margin (Net
Profit Ratio) × Asset Turnover
 Debt Ratio = Total Liabilities / Total
Assets
 Equity Ratio = 1 - Debt Ratio
 Return on Equity = Return on Assets /
Equity Ratio