Saturday, 23 August 2014

Chit Chat: Important Keys Business Financial Ratios to Know

Type of Ratios
What it Measures
Activity Ratios
Accounts Receivable Turnover
Annual Credit Sales/ Account Receivable
Average length of time it takes a firm to collect credit sales in %
Average Collection Period
Account Receivable/ (Total Credit Sales/ 365 days)
Average length of time it takes a firm to collect on credit sales in days
Inventory Turnover
Sales/Inventory of Finished Goods
Whether a company holds excessive stocks of inventories and how inventories are sold when compared to the industry average
Fixed Assets Turnover
Sales/Fixed Assets
Sales productivity, plant and
equipment utilization
Total Assets Turnover
Sales/Total Assets
Whether a company is generating a sufficient volume of business for the size of its asset investment
Leverage Ratios
Debt to Total Assets Ratio
Total debt/Total Assets
Total % of funds that are provided by creditors
Debt to Equity Ratio
Total Debt/Total Stockholders’ Equity
Total % of funds provided by creditors versus by owners
Long Term Debt to Equity Ratio
Long Term Debt/ Total Stockholders’ Equity
Balance between debt and equity in a firm’s long-term capital structure
Time Interest Earned Ratio
Profits Before Interest and Taxes/Total Interest Charges
The extent to which earnings can decline without the company becoming unable to meet its annual interest costs
Liquidity Ratios
Current Ratios
Current Assets/Current Liabilities
The extent to which a company can meet its short-term obligations
Quick Ratio
Current Assets Minus Inventory/Current Liabilities
The extent to which a company can meet its short-term obligations without relying upon the sale of its inventories
Growth Ratios
Dividends per share
Annual Percentage Growth in Dividends per Share
Growth rate in dividends per share
Earnings per share
Annual Percentage Growth in EPS
Growth rate in EPS
Net Income
Annual Percentage Growth in Profits
Growth rate in profits
Annual Percentage Growth in Total Sales
Growth rate in sales
Profitability Ratios
Earnings Per Share (EPS)
Net Income/ Number of Shares of Common Stock Outstanding
Earnings available to the owners of common stock
Gross Profit Margin
Sales Minus Cost of Goods Sold/ Sales
Total margin available to cover operating expenses and yield a profit
Operating Profit Margin
Earnings Before Interest and Taxes (EBIT)/ Sales
Profitability without concern for taxes  and interest
Price Earnings Ratio
Market Price Per Share/ Earnings per Share
Attractiveness of firm on equity markets
Net Profit Margin
Net Income/ Sales
After-tax profits per dollar of sales
Return on Total Assets (ROA)
Net Income/Total Assets
After-tax profits per dollar of assets this ratio is also called return on investment (ROI)
Return on Stockholders’ Equity (ROE)
Net Income/ Total Stockholders’ Equity
After-tax profits per dollar of stockholders’ investment in the firm

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