Financial Ratios
Method of Calculation
Description
= Current Assets - Current Liabilities
Measures the relationship of Current Assets to
Current Liability in absolute terms. Represents a
cushion in meeting current liabilities
=Current Assets/Current Liabilities
To give a general indication of the ability of a
business (borrower) to meet its current obligations.
= Cash/Current Liabilities
To supplement the current ratio in measuring
liquidity, this ratio places more emphasis on cash.
=(Current Assets-Inventory)/Current Liabilities
To supplement the current ratio in measuring
liquidity, this ratio places more emphasis on liquid
assets which can be quickly converted into cash.
=Total Liabilities/Total Assets
Measures the proportion of all debts provided by
lenders to finance all assets.
Liquidity Ratios
Net working capital ($000)
Current ratio (times)
Cash ratio (times)
Quick ratio (times)
Leverage and Debt Coverage Ratios
Debt-to-total assets ratio (percent)
Debt-to-equity ratio (times)
Times-interest-earned ratio (times)
=(Profit before Tax + Finance Costs)/Finance Costs
Measures the proportion of all debts in relation to
the total equity
Shows the debt-paying ability of a business or its
capacity to service the finance costs.
Measures ability to meet debt and Dividend payments
=Total Debt/Total Equity
Debt Service Coverage Ratio
(times)
=Net Profit + Extraordinary Items + Depreciation + Finance Costs
Principal & Interest commitments + Dividends
Interest Coverage Ratio
(times)
=Net Profit before Interest & Taxes/Interest Payable
=Long Term Debt/Shareholder Equity + Long Term Debt
Measures ability to cover interest payments
Measures ability to pay Debt and Interest. The higher
the degree of operating leverage, the higher the risk
of not repaying debt and interest.
=(Profit before Tax + Finance Costs + Lease Pymts)
(Finance Costs + Lease Payments)
Shows the ability of a business to service the
finance costs and any other contractual payments.
=Trade Receivables
(Revenues/365)
Measures the number of days it takes to collect trade
receivables
Inventory Turnover (times)
=Cost of Sales/ Inventory
Shows how long it takes for inventories to turn
around or how fast it moves.
Average Payment Period (days)
=Trade Payables
(Cost of Goods Sold/365)
Measures the number of days it takes to make
payments to trade creditors
Operating Leverage or Gearing Ratio (times)
Fixed-charges-coverage ratio (times)
Asset-Management & Activity Ratios
Accounts receivable performance measures
Average collection period (days)
Inventory performance measures
Asset ratios
Capital assets turnover ratio (times)
Total assets turnover ratio (times)
=Revenue/Non-Current Assets
=Revenue/Total Assets
Measures how intensively a firms non-current assets
such as property, plant, and equipment are working.
Measures the intensity by which all assets, that is,
current and non-current assets are used to generate
revenue
Profitability Ratios
Gross Profit Margin
(percent)
Operating Margin (percent)
Return on revenue ratio (percent)
Return on total assets ratio (percent)
Return on equity ratio (percent)
Return on Shareholder Investment (ROI) (percent)
Operating Expenses to Revenues (percent)
=Gross Profit/Revenue
=Operating Profit before interest & Tax/Revenue
Shows the efficiency of managing cost of goods sold
Shows the efficiency of a business, and ability to pay
fixed costs
=Net Profit/Revenue
Shows the overall profitability after interest and tax
= Net Profit/Total Assets
Measures the return on funds invested in the business
by both the owners and the lenders
=Profit/Total Equity
Shows how profitable a business is to its owners
= Net Profit after Tax/Shareholder Investment
=Operating Expenses/Revenues
= $Sales in Y2 - $Sales in Y1
$Sales in Y1
Measures the efficiency of an investment
Measures the efficiency of management of operating
expenses.
=Operating Profit before Interest & Taxes
Shareholder's Equity & LTD
Measures the growth rate in Sales Revenues
Measures a companys efficiency at allocating the
funds pro-vided by shareholders and long-term
financing to profitable investments. Gives a sense of
how well a company is using its money to generate
Dividends per Share
= Total Dividends/#Shares Outstanding
Dividend per share gives an indication of how much
money a shareholder will receive for each share held.
Dividend payout Ratio
=Total Dividends Paid/Net Profit after Tax
Measures how much of profits after tax are paid back
to shareholders in the form of dividends.
= Total Dividends Paid/Market Value per Share
Measures the return on funds invested in the business
by shareholders
=Net Profit after Tax/Total # Shares Outstanding
Calculates the part of the net profits that is attributed
to each share
=Market Value per Share/Earnings per Share
A popular measure of measuring the relationship of
share price to the Earnings ability of the company per
share
Growth in Sales
Return on Capital Employed (ROCE)
Shareholder Return Ratios
(percent)
(percent)
Dividend Yield
Earnings per Share (EPS)
Price/Earnings (P/E) Ratio
