financial ratios

Ratio Formula Significance

Current

ratio

Current

assets/current

liabilities

Note: Some analysts

don’t include

prepaid expenses in

the computation of

current assets.

Signifies

the firm’s

capacity to

pay or meet

current

financial

obligations


Quick

ratio

Quick

assets/current

liabilities

QA = cash +

trading securities

+ trade & other

receivables

A stricter test

of liquidity.

Suggests the

firm’s ability to

pay current

financial

obligations by

considering

more liquid

current assets.


Current

Assets to

Total assets

of Working

capital to

Total assets

Current

assets/To

tal

assets

Suggests the

relative liquidity

of the total

assets and

shows the

proportion of

current assets

to total assets.


Each

current

asset item

to total

current

assets

Each

current

asset item /

total

current

assets

Signifies the

proportion of

each current

asset item to

total assets.


Cash flow

liquidity

ratio

(Cash &

cash equiv. +

trading

securities +

CF from optg

activities) /

current

liabilities

Gauges the

firm’s ability

to pay current

financial

obligations by

considering

cash & other

cash equiv.


Defensive

interval

ratio

Current

liabilities /

cash and

cash equiv.

Indicates the

coverage of

current

liabilities


Receivable

Turnover

Net sales or

net credit

sales/ ave.

receivables

Signifies the

number of times

the average

receivables are

collected during

the year. Also,

measures the

firm’s efficiency

in collecting

receivables.


Ave.

collection

period or

number of

days in

receivables

365 days or

360 days /

receivable

turnover

Indicates the

number of days

the firm collects

its average

receivables. It

implies the

efficiency of the

firm in

collecting

receivables.


Merchandis

e turnover

Cost of

goods sold /

ave.

merchandise

inventory

Suggests the

number of times

the average

inventory was

disposed of during

the accounting

period. It also

signifies the over

or under

investment of the

firm in inventory.


Work in-

process

turnover

cost of

goods

manufacture

d / ave. work

in process

invtory

Signifies the

number of times

average inventory

was produced

during the

accounting

period. Indicates

the time taken to

produce the

products.


RM turnover RM used /

ave. RM

inventory

Measures the

number of times

average RM

inventory was

used during the

period.

Indicates the

sufficiency of

the RM

available.


Number of

days in

inventory

365 or 360

days /

inventory

turnover

Indicates the

number of days

by which

inventories are

used or sold.

Implies the

firm’s efficiency

in consuming or

selling

inventories.


Working

capital

turnover

Net sales /

average

working

capital

Signifies the

pace by which

working capital

is used.

Indicates the

adequacy of

working capital

in the firm’s

operations.


Current

asset

turnover

CSG+optg

expenses+inc

ome

taxes+other

expenses

(excluding

dep’n& amort)

/ ave. current

assets

Signifies the

pace by which

current assets

are used.

Indicates the

adequacy of

current assets

in the firm’s

operations.


Payable

turnover

Net credit

purchases or

net purchases

/ ave trade &

other

payables

Signifies the

firm’s ability to

pay trade

payables. Also

measures the

number of times

the amount of

average payables

is paid during the

accounting

period.


Optg cycle

(trading

concern)

Days’ sales in

merchandise

invty + no.

days to

collect

receivables

Measures the

length of time

in order to

convert cash

to inventory to

receivables

and back to

cash.


Optg cycle

(mfg.

concern)

(No. days usage

in RM invty + no.

days in pdn

process + no.

days’ sales in

finished goods

invty + no. days

to collect

receivables) /

ave. cash balance

Measures the

length of time in

order to convert

cash to RM invty

to work-in-

process to

finished good

invty to

receivables and

back to cash.


Days cash Cash optg

costs / 365

or 360 days

Indicates the

ability of the

firm’s cash

to pay the

ave. daily

cash

obligations.


Asset

turnover

Net sales /

ave. total

assets

Indicates the

firm’s ability

to efficiently

manage their

assets to

generate

revenue.


Property,

plant &

equipment

turnover or

fixed asset

turnover

Net sales /

ave. PPE

assets

Indicates the

firm’s ability

to efficiently

manage their

PPEs to

generate

revenue.


Debt to

Equity Ratio

Total

liabilities/ow

ner’s equity

Measures the

relationship or

proportion of

the capital

provided by

creditors to the

capital

provided by

owners.


Equity to

debt ratio

Owner’s

equity/total

liabilities

Measures

the margin of

safety of

creditors


Proprietary

or equity

ratio

Owner’s

equity/total

assets

Measures the

proportion of the

firm’s assets

coming from its

owners.

Signifies

financial stability

of the firm and

cautions the

creditors.


Debt ratio Total

liabilities/tot

al assets

Measures the

proportion of

the firm’s

assets coming

from its

creditors. It

also signifies

the extent of

trading on

equity.


Fixed assets

to total

owner’s

equity

PPE or fixed

assets

(net)/owner’s

equity

Measures

the portion

of the

owner’s

equity used

to acquire

fixed assets.


Fixed assets

to total

assets

PPE or fixed

assets

(net)/total

assets

Signifies

whether the

firm over or

under

invested in

PPE.


Fixed assets

to total

long-term

liabilities

PPE or fixed

assets

(net)/total

long-term

liabilities

Measures

the extent

covered by

the carrying

value of PPE

to long-term

obligation.s


Plant

turnover

Net

sales/ave.

PPE or fixed

assets (net)

Signifies the

firm’s

efficiency in

using their

PPE.


Book value

per share

Ord.

shareholder’

s equity/no.

ord. shares

outstanding

Measures the carrying

value of net assets for

every ord. share

outstanding. Also

indicates the amt.

which the

shareholders can

recover if the firm

sells the assets upon

liquidation or converts

them into cash at their

book values.


No. times

int. earned

Net income

before int.

and income

taxes/annual

int. charges

Signifies the

firm’s capacity in

paying fixed

interest charges.

Measures the

number of times

interest charges

is covered by the

firm’s operating

income.


No. of times

preference

shares

dividend

reqmt is

earned

Net income

after

tax/preferen

ce shares

dividend

reqmt

Measures the

firm’s ability

to pay the

preference

shareholder’s

dividend

requirement.


No. of times

fixed

charges are

earned

Net income

before taxes

and fixed

charges/fixe

d expenses

(rent, int., SF

payments

before taxes

Indicates the

firm’s ability

to pay annual

fixed charges.


Rate of

return on

sales or net

profit ratio

or net profit

margin

Net

income/net

sales

Measures the

amount of net

income per

peso of sales.

Shows the

proportion of

net income to

the firm’s

sales revenue.


Rate of

return to

total assets

(ROA)

Return on

sales X

Asset

turnover or

net

income/ave.

total assets

Measures the

company’s

profitability in using

their total assets.

Indicates the net

income generated by

using the firm’s total

assets.

Signifies mgt

efficiency in using

their assets to earn

income.


Asset

turnover

Net

sales/ave.

total assets

Signifies mgt

efficiency in

using their

assets to

generate

sales

revenue.


Gross profit

ratio

Gross

profit/net

sales

Measures the gross

profit per peso

sales revenue.

This ratio is

important in

ascertaining the

adequacy of gross

profit to meet

operating expenses

plus their desired

profit.


Operating

ratio

Operating

income/net

sales

Measures

the portion

of sales

revenue used

to cover

operating

costs.


Cash flow

margin

Cash flow

from optg

activities/net

sales

Indicates the

firm’s ability

to translate

sales into

cash.


Rate of

return on

current

assets or

working

capital

Net

income/ave

current

assets

Gauges mgt

efficiency in

using current

assets to

generate net

income.


Rate of return

on net

working

capital

(current

assets –

current

liabilities)

Net

income/ave

net working

capital

Measures

mgt

efficiency in

using net

working

capital to

generate

revenue.


Rate of

return on

owner’s

equity

Net

income/ave

owner’s

equity

Indicates the

amount of return

per peso of

owner’s equity.

Gauges mgt

efficiency in

using its

invested capital

to generate

revenue.


Price-

earnings

ratio

Market price

per

share/earnin

gs per share

Indicates the

relationship

between the

market price or

ord shares and

the earnings of

each ord.

share.


Earning-price

ratio or

capitalization

rate

Earnings per

share/marke

t price per

share

Measures the

rate at which

the share

market is

capitalizing the

value of

current

earnings.


Dividends per

share

Dividends

paid or

declared/ord

shares

outstanding

Indicates the

earnings

distributed to

the owners

on a per

share basis.


Payout ratio

or dividends

payout

Dividends

per

share/earnin

gs per share

Measures

the % of the

company’s

earnings

paid to

owners.


Retained

earnings to

share capital

Retained

earnings/sha

re capital

Measures

the

probability of

declaration

of dividends

by the firm.


Market price

to book value

per share

Market price

per

share/book

value per

share

Signifies the

under or over

valuation of

shares.

financial ratios

Business