RATIO ANALYSIS
Ratio / Formula / What It MeansLiquidity - ability to satisfy short-term debt
Current Ratio / Current Assets
Current Liabilities / Value of liquid assets available to cover short-term debt
Quick Ratio / Current Assets – Inventory
Current Liabilities / Same as current except inventory is not included in liquid assets
Activity – speed with which various accounts are converted into sales or cash
Inventory Turnover / Sales
Average Inventory / How many times during the year the company turns over inventory (reorders)
Average Age of Inventory / 360
Inventory Turnover / How many days goods stay in stock before being sold
Accounts Receivable Turnover / Total Credit Sales
A/R / How quickly customer accounts are paid
Average Collection Period / Accounts Receivable
Sales ÷ 360 / Number of days it takes company to collect from customers
Total Asset Turnover / Sales
Total Assets / How efficiently the company is using its assets to generate sales
Debt Ratios – degree of indebtedness and the ability of the firm to pay debts
Debt Ratio / Total Liabilities
Total Assets / Percentage of firms assets owned by others (creditors).
Times Interest Earned / Operating Income
Interest Expense / How many times a year the company makes enough income to pay interest expenses
Profitability – ability to earn income
Gross Profit Margin / Gross Profit
Sales / Percentage of sales dollar left after goods are purchased
Operating Profit Margin / Operating Profit
Sales / Percentage of sales dollar left after goods are purchased & operating expenses paid
Net Profit Margin / Net Income
Sales / Percentage of sales dollar left after all expenses are deducted
Return on Assets / Net Income
Total Assets / How much money the firm earned from each dollar of asset investment
Return on Equity / Net Income
CS Equity / How much money the firm earned from each dollar of shareholder investment
Market Ratios – relate a firm’s current price in the market to the accounting values
Earnings per Share / Net Income
# CS shares outstanding / Number of dollars earned on behalf of each shareholder.
Price/Earnings (P/E) / Market Price
Earnings per Share / How much money are investors willing to pay for each dollar of a firm’s earnings
Market to Book / Market Price
CS Equity ÷ Issued Shares / How much more investors are willing to pay for stock than the amount listed in the balance sheet
FINANCIAL STATEMENT FORMATS
1 - Income Statement
Sales
- Cost of Goods Sold
Gross Profit
- Operating Expenses
Operating Profit
- Interest Expense
Income before taxes
- Tax Expense
Net Income
2 - Statement of Retained Earnings
Beginning Retained Earnings
+ Net Income
- Dividend Payments
Ending Retained Earnings
3 - Balance Sheet
Current Assets
+ Fixed Assets
Total Assets
Current Liabilities
+ Long-Term Liabilities
Total Liabilities
Preferred Stock
+ Common Stock*
+ Paid-In Capital in Excess of Par*
+ Retained Earnings*
Total Stockholders’ Equity
Total Liabilities and S/E
*Component of Common Stock Equity
4 - Cash Flow Statement
Cash Flow from Operations
Net Income
+ Payments from A/R
- Payments to A/P
- Cash Flow from Operations
Cash Flow from Investing
Purchase/Sale of Assets
+/- Purchase Sale of Marketable Sec.
Cash Flow from Investing
Cash Flow from Financing
Common Stock Issue/Repurchase
- Stock Dividends
+/- Bonds Issued/Paid
Cash Flow from Financing
Net Cash Flow