Financial Ratio’s Reference Sheet
Liquidity Ratio’s - Company’s ability to meet its Short Term Obligations.
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Current Ratio = Current Assets / Current Liabilities
Ex. CR of .73 means they have 73 cents in Current Assets for every Dollar in Current Liabilities.
CR should be Greater than 1.
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Quick Ratio = Current Assets – Inventory / Current Liabilities
QR is the firm’s ability to meet its Short Term Obligations Without Selling Inventory.
Ex. QR of .44 means they have 44 cents in liquid assets for every dollar in Current Liabilities
QR should be Greater than 1.
Leverage Ratio’s - How much Debt are they carrying?
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Debt to Equity - Is the amount of Capitalization coming from Debt.
Debt to Equity = Total Liabilities / Total Equity
Ex. Debt to Equity of 7.6 means the company has 7.6 times the amount of debt to equity.
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Degree of Financial Leverage ( Equity Multiplier) - Amount of Capitalization coming from
assets.
DFL = Total Assets / Total Equity
Ex. DFL of 8.6 means they are relying 8.6 times more on Debt to finance their assets.
The higher the number, the more they are relying on debt to finance their assets.
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Times Interest Earned (AKA Interest Coverage) – Measures Long Term Solvency. How well do
they have interest obligations covered?
TIE = Profit before interest and tax / Interest (IE. EBIT/ Interest Expense)
Ex. TIE of 12.11 means the interest they pay to bondholders is covered 12.11 times over.
Activity Ratio’s – Focuses on How well Assets are being Managed.
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Total Asset Turnover = Sales / Total Assets
Ex. TAT of 1.33 means $1.33 of Sales is generated for each dollar invested in assets.
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Inventory Ratio – How efficiently are they managing inventory?
IR = COGS / Inventory
IR of 8.3 means they turned over their entire inventory 8.3 times.
The larger the better.
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Receivables Turnover = Credit Sales / Accounts Receivable
Ex. RT of 19.77 means they collected their outstanding credit accounts and re-loaned the money
out 19.77 times during the year. The larger the better.
Profitability Ratio’s – Success turning Sales into Profits.
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Gross Profit Margin – Measures operating efficiency. How well did they control costs?
It is the profitability ratio that measures how much of every dollar in sales is left over after
paying COGS.
GPM = Sales – COGS / Sales
GPM of 36.19% means they generated 36.19 cents in profit after paying COGS.
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Operating Margin – Profitability without concern for taxes and interest.
OM = EBIT / Sales
Ex. OM of 15.45% means they generated 15.45 cents in Profit, before interest & tax for every
dollar in Sales.
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Return on Sales – After tax profit per dollar of Sales.
ROS = Net Income / Sales
Ex. ROS of 7% means the company generated 7 cents profit, after tax, for every $ in sales.
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Return on Assets – After tax profit per dollar of Assets.
ROA = Net Income / Total Assets.
Ex. ROA of 7% means the company generated 7 cents profit, after tax, for every $ in Assets.
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Return on equity – Measures how well the stockholders did during the past year.
ROE = Net Income / Total Stockholders Equity
Ex. ROE of 17.5% means the stockholders generated 17.5 cents in after tax profit for every dollar
they invested in the firm.
Dupont ROE – Breaks down ROE into its 3 Components.
(ROS) or Net Profit Margin = Net income / Sales
Efficiency Measure
X
(TAT) or Asset Turnover = Sales / Total Assets
Effectiveness Measure
X
(DFL) or Equity Multiplier = Total assets / Equity
Leverage Measure