Calculating Financial Ratios
Calculating Financial Ratios
Lesson Goals:
• Learn ratio analysis
• Calculate key ratios
Calculating Financial Ratios
Return on Investment (ROI)
Net Profit Before Taxes
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Owner’s Equity
The proportion of sales that is
realized as the profit of the firm
Calculating Financial Ratios
Return on Sales (ROS)
Net Profit Before Taxes
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Net Sales
The proportion of sales that is
realized as the profit of the firm
Calculating Financial Ratios
Debt to Asset Ratio
Total Liabilities
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Total Assets
The proportion of assets that would
have to be liquidated to repay all debts
Calculating Financial Ratios
Current Ratio
Current Assets
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Current Liabilities
Indicates the ability of the level of current
assets to be liquidated and
retire the firms current liabilities
Calculating Financial Ratios
Quick Ratio
Current Assets - Inventory
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Current Liabilities
Defines whether the level current
assets minus inventory is sufficient
to retire current liabilities
Calculating Financial Ratios
Average Collection Period
Credit Sales
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Accounts Receivable
Demonstrates the number of times
in a period that accounts receivable turn over
Calculating Financial Ratios
Inventory Turnover Rate
Cost of Goods Sold
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Average Inventory
Demonstrates the number of
times in a period that inventory turns over
Calculating Financial Ratios
Cash Turnover Rate
Net Sales
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Current Assets – Current Liabilities
The proportion of sales that is
realized as the profit of the firm
Calculating Financial Ratios
Sales Per Square Foot
Net Sales
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Square Footage of Selling Space
Indicates the level of sales per square
foot of selling space
Calculating Financial Ratios
Sales Per Hour
Net Sales
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Number of Working Hours in Period
Indicates the level of sales per number
of employee working hours in the period
Calculating Financial Ratios
Sales Per Employee
Net Sales
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Number of Full-time Equivalent Employees
Indicates the level of sales per number
of full-time employee equivalents
Calculating Financial Ratios
Sales to Total Assets
Net Sales
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Total Assets
Indicates the level of sales per dollar
of assets invested in the business
Calculating Financial Ratios
Ratio Analysis Process
1. Calculate ratios
2. Maintain records of your ratios
over time
3. Compare your ratios against
similar businesses
4. Determine where adjustment is
needed and develop action
strategies
5. Measure results