FINANCIAL STATEMENT RATIOS

A guide to understanding financial statements

(2014 edition)
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance
Liquidity measures the ability to of the company to pay its currently
maturing liabilities or short term debt. Higher liquidity ratio doesnt indicate
that the company is performing well above others because in order for the
company to have a higher liquidity, it should invest more on short term than
long term. Long term investments earn more compared to short term
investments.
Ratio
Formula
Remarks
Current
Ratio

Current Assets
Current Liabilities

Acid-Test
Ratio or
Quick Ratio

Current Assets - Inventories - Prepaid Expenses Excludes

Current Liabilities
Inventories and
Prepaid Expenses in
the formula since
these current
assets are the least
liquid among other
current assets.
More stringent than
Current ratio

Cash Ratio

Cash and Cash Equivalents

Current Liabilities

Assumes that
current assets can
be converted into
cash within one
year. The higher
the current ratio
the better the
liquidity position.

Excludes all other

current assets that
are non-cash.
Companies might
have a hard time
collecting
receivables. Most

Financial Statement Ratios : A guide to understanding financial statements

Page 1 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

strict among other

liquidity ratio.

Working
Capital

Cash
Conversion
Cycle

Defensive
Interval
Ratio

Current Assets Current Liabilities

Though not a ratio,

this is another way
to measure liquidity

Days Sales Outstanding + Days Sales

in Inventory Days Payable
Outstanding

Measures how long

the companys cash
are tied up to other
resources. The
lower the CCC the
better

Cash + Receivables + Marketable Securities

Daily Cash Expenditure

It measures the
companys ability
to sustain their
daily cash
expenditure by
maintaining enough
cash, receivables
and marketable
securities balance.

Asset Management measures the companys efficiency in managing

their assets. Assets must be efficiently managed in order to generate
enough revenue for the company. This classification of ratio includes
turnover ratios and days sales.
Ratio
Formula
Remarks
Inventory
Turnover

Cost of Goods Sold

Average Inventory

Measures how
many times the
company replaces
their inventory. The
higher the better
but it should be
match with
business with
similar structure.

Financial Statement Ratios : A guide to understanding financial statements

Page 2 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

Receivable
Turnover

Sales
Average Receivables

Measures how
many times the
company turn their
receivable. The
higher the better.

Fixed Asset
Turnover

Sales
Average Net Fixed Assets

Measures the
efficiency of the
company utilizing
their fixed assets
to generate
revenue. The
higher the better

Working
Capital
Turnover

Revenue
Average Working Capital

Measures the
firms efficiency in
utilizing their
working capital to
generate revenue.
The higher the
better.

Total Asset
Turnover

Sales
Average Total Assets

Measures the
firms efficiency in
managing their
assets to generate
revenue.

Days Sales
Outstanding

Days Sales in
Inventory

Average Receivables
Credit Sales / 365

Average Inventory
Cost of Goods Sold / 365

Measures how long

the company
collects their
Accounts
receivable.
Measures how long
the company
convert their
Inventory back to

Financial Statement Ratios : A guide to understanding financial statements

Page 3 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

cash

Capital
Intensity
Ratio

Total Assets
Revenues

Capital Intensity
measures the
companys capital
requirement given
the amount of
revenue

Profitability the ability of the company to generate income. Trade-off

between liquidity and profitability exists since investing in short term or
current assets compromises the ability of the companys resources to
realized greater income in long term assets.
Ratio
Formula
Remarks
Net Profit
Margin

Net Profit
Sales

Percent of sales
that is attributable
to Net Profit.
Measures the
companys ability
to control cost.

Operating
Profit Margin

EBIT
Sales

Percent of Sales
that is attributable
to EBIT. Measures
the companys
ability to cover
operating
expenses.

Pretax
Margin

Earnings before taxes

Sales

Percent of Sales
that is attributable
to operating
income after
deducting taxes
without
consideration to
interest cost.

Financial Statement Ratios : A guide to understanding financial statements

Page 4 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

Gross Profit
Margin

Gross Profit
Sales

Measures the
markup of
inventory based on
Sales

Basic Earning
Power

EBIT
Average Total Assets

Ability of the
companys asset
generating
operating income

Return on
Invested
Capital

EBIT
Short + Long term debt + Equity

Percentage return
to suppliers of
capital

Return on
Sales

Net Income
Sales

Return on
Assets

Net Income
Average Total Assets

Same with Net

Profit Margin

Percentage return
on total assets.
Measures the
capacity of the
companys asset to
generate revenue

Return on
Equity

Net Income
Average Total Equity

Percentage return
on equity.
Measures the
return of the
stockholders from
the company. The
higher the more
attractive the
company is.

Return on
Common
Equity

Net Income
Average Common Equity

Modified version of
Return on Equity. It
only includes
common

Financial Statement Ratios : A guide to understanding financial statements

Page 5 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

stockholders.

Leverage or Solvency ability of the company to pay for its obligations. It

also measures the companys interest paying capacity by calculating
operating income.
Ratio
Formula
Remarks
Debt Ratio

Total Debt
Total Assets

Measures how
many percent of
the companys
assets are financed
by debt. The higher
the debt ratio the
more levered the
company is. The
company is more
levered the riskier.

Debt-Equity
Ratio

Total Deb t
Total Equity

Measures the
proportion of debt
over equity. The
greater the value,
the more levered
the company. If this
ratio is equal to 1 it
means that assets
are 50% financed
by debt and 50%
are financed by
equity.

Long term
debt to
Equity Ratio

Long term debt

Total Equity

Modified version of
debt-equity ratio.
Focuses on long
term debt only.

Financial
Leverage
Ratio

Total Assets
Total Equity

Measures the
leverage of the
company. The

Financial Statement Ratios : A guide to understanding financial statements

Page 6 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

higher value
means greater
amount of debt.

Times
Interest
Earned

Earnings before Interest and Taxes

Interest Expense

Measures the
ability of the
company to cover
interest expense
thru operating
income.

Fixed Charge
Coverage
Ratio

EBIT + Lease Payments

Interest Expense + Lease Payments

Measures the
capacity of the
company to cover
interest and lease
payments (Fixed
charges)

Market Value - these set of ratios considered the companys market value
(thru current stock prices) and per share amounts. Can be used also for
relative valuation.
Ratio
Formula
Remarks
Price
Earnings
Ratio

Price per share

Earnings per share

The relative value

of price in terms of
its earnings. The
greater P/E
compared to
competitors
indicate that the
company is
Overvalued.

Price Cash
Flow Ratio

Price per share

Operating Cash flow per share

The relative value

of price in terms of
its cash flows. The
greater the P/CF
compared to
competitors
indicates that the

Financial Statement Ratios : A guide to understanding financial statements

Page 7 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

company is
Overvalued.

Price to Sales
Ratio

Price per share

Sales per share

The relative value

of price in terms of
its sales. The
greater the P/S
compared to
competitors
indicates that the
company is
Overvalued.

Price to Book
Value Ratio

Price per share

Book Value per Share

The relative value

of price in terms of
its equity. The
greater the P/BV
compared to
competitors
indicates that the
company is
Overvalued.

Book Value
per Share

Total stockholder's equity - Preferred Stock

No. of outstanding shares

Measures the
balance sheet
value of equity per
share.

Basic
Earnings per
Share

Net Income - Preferred Dividends

W.A.C.S.O

Measures the value

of income on a per
share basis.

Cash Flow
per Share

Operating Cash Flow - Preferred Dividends

Common Shares Outstanding

Modified version of
EPS. Instead of
using Net Income,
Operating Cash
Flows are used
instead.

Financial Statement Ratios : A guide to understanding financial statements

Page 8 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

EBITDA per
share

EBITDA
No. of Common Shares Outstanding

Income per share

measurement that
excludes non-cash
expenses, interest
plus taxes

Dividends
per share

Dividends
No. of Common Shares Outstanding

Amount of
dividends
attributable to the
number of shares.

Dividends
payout ratio

Dividends per share

Earnings per share

The portion of
earnings
distributed as
dividends.

Retention
rate

Sustainable
growth rate
(g)

( 1 - Dividends Payout Ratio)

Return on Equity x Retention Rate

The portion of
earnings not
distributed as
dividends.

Used in equity
valuation as the
growth rate.

Segment Ratio - these set of ratios are applicable to companies with

different segments. Each segments had their own revenue and expenses in
which it is worthy to calculate ratios for each of them.
Ratio
Formula
Remarks
Segment
Margin

Segment

Segment Profit
Segment Revenue

Modified version of
Profit Margin.
Focuses on a
specific segment.

Modified version of

Financial Statement Ratios : A guide to understanding financial statements

Page 9 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

Asset
Turnover

Segment Revenue
Segment Assets

Asset Turnover.
Focuses on a
specific segment
not on the
company as a
whole.

Segment ROA

Segment Profit
Segment Assets

Modified version of
ROA. Focuses on a
specific segment
not on the
company as a
whole.

Segment
Debt Ratio

Segment Liabilities
Segment Assets

Modified version of
Debt Ratio.
Focuses on a
specific segment
not on the
company as a
whole.

DuPont Analysis and the Extended DuPont Formula

Brief History
The name DuPont is from a company that was originally founded by
Eleuthre Irne du Pont as a gunpowder mill in July 1802. Today, it is now
one of the largest chemical companies in the world. DuPont was a pioneer
with respect to management accounting systems, including devising the
accounting ratio Return on Investment. Around 1912 their ROI approach was
extended by one of their financial officer, Donaldson Brown, who
decomposed the ROI into a product of the Turnover and Profit Margin Ratio.
(Financial Trading System website)
Formally, the DuPont formula is:
Net Income Sales
Total Assets
x
x
Sales
Total Assets Total Equity

Financial Statement Ratios : A guide to understanding financial statements

Page 10 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance

Note that the product of the first two terms is ROA. The third term is related
to the financing decision; a highly leveraged firm has low Shareholders
Equity compared to Assets, while as before, the ROA results from the
investment decision. In the DuPont formula, the effects of the investment
decision are further decomposed into the product of operating efficiency as
measured by the Profit Margin Ratio and asset utilization efficiency as
measured by Asset Turnover Ratio.
CFA Curriculum Vol. 3 of Level 1 explained the expanded form of the DuPont
Equation.
EBIT
EBT
Net Income
Sales
Total Assets
x
x
x
x
Sales
EBIT
EBT
Total Assets
Total Equity
First ratio indicates the EBIT margin the second indicates Interest burden and
the third indicates Tax burden. Though not commonly used, it will be helpful
to a lot of analyst to explain the differences between EBIT, Interest and
Taxes.

Sources :
Fundamentals of Financial Management 13th ed. Brigham. Cengage
CFA Curriculum Volume 3 2015. Wiley Publishing
Financial Trading System Website
Corporate Finance, Brealey, Myers, Marcus. McGraw Hill Education

Financial Statement Ratios : A guide to understanding financial statements

Page 11 of 11
Prepared by : Carlsberg S. Andres, CPA, MSc in Finance