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