Financial Ratios

Financial ratios are the significant relationships between items in the financial
statements expressed in mathematical form. As indicators of profitability, liquidity
and stability, they are used to determine the possible areas of weaknesses and
strengths of an organization. In using ratio analysis, the relationships arrived at are
compared with chosen standards such as industry ratios, the financial ratios per
budgets and those derived from financial statements of the preceding period. The
analyst should bear in mind that ratios are mere indicators so that interpretation
thereof should not be considered as conclusive.

Indicators of Profitability
1. Rate of Return on Sales

Formula
Net Income
Net Sales

2. Rate of Return on Total

Assets

Return on sales x Asset

Turnover
or:
Net Income
Average Total Assets

3. Asset Turnover

Net Sales
Average Total Assets or
Total Investment in the
business

Significance
Indicates the amount of
net income per peso of
sales or the profitability
based on sales.
Indicates the profitability
in the use of the total
assets or total capital,
both
borrowed
and
invested.
Indicates the efficiency in
the use of total resources.

4. Gross profit ratio

Gross Profit
Net Sales

Indicates the gross margin

per peso of sales. Used in
Determining the adequacy
of gross margin to cover
operating expenses and
provide desired profit.

Cost of Sales + Operating

Expenses
Net Sales

Indicates what portion of

sales is absorbed by
operating costs.

5. Operating Ratio

6. Rate of Return
Current Assets

on
Net Income
Average Current Assets

7. Current Asset Turnover

Cost of Sales + Operating

Indicates the profitability

in the use of current
assets.

8. Rate of Return per

Current Asset Turnover

Expenses (excluding
charges not requiring
current assets)
Average Current Assets
Rate of Return on Current
Assets
Current Asset Turnover

9. Rate of Return
Working Capital

10.
Working
Turnover

on

Capital

Net Income
Average Working Capital

11. Rate or Return per

Working Capital Turnover

Cost of Sales + Operating

Expenses (excluding
charges not requiring
working capital)
Average Working Capital

12.
Invested
Turnover

Rate of Return on Working

Capital
Working Capital Turnover

Capital

Net Sales
Average Owners Equity
13. Rate of Return
Owners Equity

on
Net Income
Average Owners Equity

14. Earnings per Share

15. Price-earnings Ratio

16. Capitalization Rate or

Net Income less preferred

stock dividend
requirement
Average Number of
Common Shares
Outstanding
Market Price per Share

Indicates the rate at which

current assets are being
used.

Indicates the percentage

of
profit
every
time
current assets are used.

Indicates the profitability

in the use of working
capital.

Indicates the rate at which

working capital is being
used.

Indicates the percentage

of profit earned every time
working capital is used.
Indicates the rate at which
owners capital is being
used or the rate at which
assets provided by owners
are being used.
Indicates profitability in
the use of invested capital
or the amount of return
per
peso
of
owners
equity.
Indicated the amount of
returns on each share of
common stock and the
ability to pay dividends.

Earnings/Price Ratio

17. Dividends per Share

18. Yield
Stock

on

Earnings per Share

Earnings per Share

Market Price per Share

Common

19. Payout Ratio

20. Retained Earnings to

Capital Stock
21. Market Price to Book
Value per Share

Dividends Paid or Declared

Common Shares
Outstanding
Dividends per Share
Market Value per Share of
Common Stock

Dividends per Share

Earnings per Share

Retained Earnings
Capital Stock
Market Price per Share
Book Value per Share

Measures the relationship

between market price and
earnings on each share.
Indicates the rate at which
the
stock
market
is
apparently capitalizing the
value of current earnings.
Shows the amount of
distributed earnings per
share.
Shows the percentage of
distributed earnings based
on market value.

Indicates the percentage

of distributed earnings
based on earnings made
per share.
Indicates the profitability
of dividend declaration.
Indicates
whether
the
stock is undervalued or
not.

Indicators of Liquidity or Short-term Solvency

1. Current Ratio

2. Acid Test Ratio

Formula
Current Assets
Current Liabilities

Significance
Indicates the ability to pay
current obligations

Quick Assets
Current Liabilities

Indicates the ability to pay

current obligations from
the more liquid current
assets.

3. Current Assets to Total

Assets

4. Ratio of Each Current

Asst Item to Total Current
Assets

Current Assets
Total Assets
Each Current Asset Item
Total Current Assets
Net Credit Sales
Average Receivables

5. a. Receivable Turnover

360
Receivable Turnover
b. Number of Days
Sales
in
Average
Receivables or Average
Collection Period
6.
a.
Merchandise
Inventory
(or
Finished
Goods) Turnover

Cost of Goods Sold

Average Inventory

Cost of Goods
Manufactured
Average Work in Process
Inventory

b. Work in Process
Turnover

Raw Materials Used

Average Raw Materials
Inventory
c.
Turnover

Raw

materials

360
Inventory Turnover

d. Number of Days
Supply in Inventory

Cost of Goods Sold +

Operating Expenses
(excluding charges not
requiring working capital)
Average Working Capital

Indicates the liquidity of

the total assets.
Indicates the liquidity of
the total assets.
Indicates the number of
times average amount of
receivables is collected
during the period and the
efficiency in collection.
Indicated the average age
of receivables or the
number of days to collect
average receivables.
Indicates the number of
times average inventory
was sold during the period
and over- (or under-)
investment in inventory.
Indicates the number of
times average inventory
was manufactured during
the period and over- (or
under-) the investment in
work in process inventory.
Indicates the number of
times average inventory
was
used
and
the
sufficiency
of
raw
materials in stock.

Indicates the number of

days required to sell or
consume
average
inventory.

7.
Working
Turnover

Capital
Cost of Goods Sold +
Operating Expenses
(excluding charges not
requiring current assets)
Average Current Assets

8. Current Asset Turnover

9. Payable Turnover

10.
a.
Marketable
Turnover

Cash
and
Securities

b. Number of Days
Operations Covered by
Cash
and
Marketable
Securities

Indicates the rate at which

working capital is being
used and the adequacy of
working capital.

New Credit Purchases

Average Payables

Indicates the rate at which

current assets are being
used and adequacy of
current assets.

Cost of Goods Sold +

Operating Expenses
(excluding charges not
requiring cash)
Average Cash and
Marketable Securities

Indicates the number of

times the amount of
average payables is being
paid.

360 days
Cash and Marketable
Securities Turnover
Or:
Average Cash and
Marketable Securities
[(Cost of Goods Sold +
Operating Expenses
excluding charges not
requiring cash)/360]

Indicates the number of

times the amount of cash
and its equivalent is used
during the period.

Indicates the number of

daysoperations covered
by cash and its equivalent.

Measures of Stability or Long-term Solvency

Formula
Total Liabilities
Owners Equity

Significance
Measures the proportion
of borrowed capital to
invested capital.

2. Equity/Debt Ratio

OwnersEquity
Total Liabilities

Indicates the margin of

safety to creditors.

3.
Proprietary
(Equity)
Ratio or OwnersEquity to
Total Assets

OwnersEquity
Total Assets

Indicates what portion of

total assets is provided by
owners or stockholders.

1. Debt/Equity Ratio

4. Debt Ratio or Total

Liabilities to Total Assets

5. Fixed Assets to Total

OwnersEquity

6. Fixed Assets to Total

Equity (or total assets)

7. Fixed Assets to Total

Long-term Liabilities

Total Liabilities
Total Assets

Fixed Assets
Total Owners Equity

Fixed Assets
Total Liabilities and
Owners Equity
Fixed Assets
Total Long-term Liabilities
Net Sales
Average Fixed Assets (net)

8. Plant Turnover

9. Book Value per Share

Common Stock Equity

Number of Common
Shares Outstanding

Indicates what portion of

total assets is provided by
creditors.

Indicates the portion of

ownersequity invested in
fixed assets.
Indicates underinvestment
or
overinvestment
in
plant,
property
and
equipment.
Indicates the portion of
long debt secured by fixed
assets.
Indicates the efficiency in
the use of property.

Times

Income before Interest

and Taxes
Annual Interest Charges

Indicates the book value

of net assets for every
outstanding
share
of
common stock.

11. Number of Times

Preferred
Dividend
Requirement is Earned

Net Income
Preferred Stock Dividend
Requirement

Indicates the companys

ability to pay fixed interest
charges.

12. Number of Times Fixed

Charges are Earned

Income before Taxes and

Fixed Charges
Fixed Charges (Rent
Expenses + Interest, etc.)

Indicates the ability to

meet annual preferred
stock
dividend
requirement.

10. Number of
Interest in Earned

Indicates the ability to

meet
annual
fixed
charges.