Ratio Analysis
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise’s financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm’s creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.
Liquidity Analysis Ratios
Current Ratio
Current Assets
Current Ratio = ————————
Current Liabilities
Quick Ratio
Quick Assets
Quick Ratio = ———————-
Current Liabilities
Quick Assets = Current Assets – Inventories
Net Working Capital Ratio
Net Working Capital
Net Working Capital Ratio = ————————–
Total Assets
Net Working Capital = Current Assets – Current Liabilities
Profitability Analysis Ratios
Return on Assets (ROA)
Net Income
Return on Assets (ROA) = ———————————-
Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Return on Equity (ROE)
Net Income
Return on Equity (ROE) = ——————————————–
Average Stockholders’ Equity
Average Stockholders’ Equity = (Beginning Stockholders’ Equity + Ending Stockholders’ Equity) / 2
Return on Common Equity (ROCE)
Net Income
Return on Common Equity = ——————————————–
Average Common Stockholders’ Equity
Average Common Stockholders’ Equity = (Beginning Common Stockholders’ Equity + Ending Common Stockholders’ Equity) / 2
Profit Margin
Net Income
Profit Margin = —————–
Sales
Earnings Per Share (EPS)
Net Income
Earnings per Share = ———————————————
Number of Common Shares Outstanding
Activity Analysis Ratios
Assets Turnover Ratio
Sales
Assets Turnover Ratio = —————————-
Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Accounts Receivable Turnover Ratio
Sales
Accounts Receivable Turnover Ratio = ———————————–
Average Accounts Receivable
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Inventory Turnover Ratio
Cost of Goods Sold
Inventory Turnover Ratio = —————————
Average Inventories
Average Inventories = (Beginning Inventories + Ending Inventories) / 2
Capital Structure Analysis Ratios
Debt to Equity Ratio
Total Liabilities
Debt to Equity Ratio = ———————————-
Total Stockholders’ Equity
Interest Coverage Ratio
Income before Interest and Income Tax Expenses
Interest Coverage Ratio = ——————————————————-
Interest Expense
Income before Interest and Income Tax Expenses = Income before Income Taxes + Interest Expense
Capital Market Analysis Ratios
Price Earnings (PE) Ratio
Market Price of Common Stock per Share
Price Earnings Ratio = ——————————————————
Earnings per Share
Market to Book Ratio
Market Price of Common Stock per Share
Market to Book Ratio = ——————————————————-
Book Value of Equity per Common Share
Book Value of Equity per Common Share = Book Value of Equity for Common Stock / Number of Common Shares
Dividend Yield
Annual Dividends per Common Share
Dividend Yield = ————————————————
Market Price of Common Stock per Share
Book Value of Equity per Common Share = Book Value of Equity for Common Stock / Number of Common Shares.
Dividend Payout Ratio
Cash Dividends
Dividend Payout Ratio = ——————–
Net Income
ROA = Profit Margin X Assets Turnover Ratio
Profit Margin = Net Income / Sales Assets Turnover Ratio = Sales / Averages Total Assets
