SUMMARY OF SELECTED FINANCIAL MEASURES
Name
Formula
Objective
Profitability and activity measures
Return on investment
(all capital)
Net Income + Interest after taxes
Average assets
To indicate the effectiveness of a business in
employing all resources within its command
Return on Asset
Operating Income
Average assets on same year
Indicates effectiveness of use of assets
Return on investment
(Stockholders’ equity)
Net Income________
Average stockholders’ equity
To indicate the effectiveness of a business in
employing capital provided by stockholders
Return on equity of common
stockholders
Net Income -- Preferred stock dividends
Average equity of common stockholders
Leverage effectiveness ratio
ROI (stockholders’ equity)
ROI (all capital)
To indicate the effectiveness of a business in
employing capital provided by common
stockholders
The higher the ratio the more effective use of
leverage.
Equity Ratio
Total Shareholders’ equity
Total Assets
Indicates proportion of total assets financed by
shareholders as distinguished from creditors.
Interest Coverage Ratio
Also referred to as Interest
Coverage
Residual Income
Earnings per Share of Common
Stock
Operating income (before interest and income taxes
Annual interest expense
Indicates ability to cover interest expense
Net Income (excluding any actual interest costs) –
imputed cost of capital (total assets x minimum rate of
return)
Income applicable to common stock(net income –
preferred dividends)
Weighted-average number of shares of common stock
outstanding during the year
Indicates the amount of earnings applicable to a
share of common stock. A decline can indicate
decrease in profitability and can create doubt on
future prospects.
1
Price/Earnings ratio
- p/e ratio
Market price per share
Earnings per share
To measure the return on the market value of
common stock
Dividend Yield
Dividend per Share
Market Price per Share
Show the rate of return earned by shareholders
based on the current price for a share of stock
Book Value per Share of
Common Stock
Inventory turnover rate
Average number of days to sell
inventory
Accounts receivable turnover
rate
Total shareholder’s equity – equity of preferred
shareholders
Share of common stock outstanding
Cost of goods sold
Average inventory
.
Indicates the net assets represented by each share
of stock.
To measure the efficiency of inventory or how
many times during the year a company is able to
sell a quantity of goods equal to its average
inventory
365
inventory turnover rate
Sales
Average accounts receivable
To measure the efficiency of accounts receivable
being turned into cash
Average days of Accounts
Receivable collection
365
Accounts receivable turnover rate
Number of days’ sales in
accounts receivable
Accounts receivable
Average sales per day
To determine the average number of days in which
accounts receivable are outstanding
Average days of accounts receivable collection +
average number of days to sell inventory
Sales
Average plant and equipment
Indicates length of operating cycle which can
indicate quality of working capital of the company
To measure the efficiency of plant and equipment
Operating Cycle
Plant and equipment turnover
To calculate average days to turn accounts
receivable into cash
2
Liquidity ratios
Working Capital
Quality of Income
Return on assets being
compared to CFFO(cash
flow from operations)
Current ratio
Coverage
Quick ratio
Current Assets – Current Liabilities
Indicates amount of cash available for the company to
meet its financial commitments
CFFO
Operating income
CFFO before taxes and interest
assets
Current Assets
Current Liabilities
Fixed Assets
Long term debt
Cash + Marketable Securities + Accounts receivable
Current Liabilities
To measure a firm’s ability to meet current obligations as
they come due
An indication of security
To measure, by a more severe test, a firm’s ability to
meet current obligations as they come due. Shows how
much and how quickly cash can be found if company
gets into trouble.
Financial measures
Debt-to-equity ratio
Debt Ratio
Times interest earned
Total Debt
Total Equity
Total Liabilities
Total Assets
Net Income + Interest + Income Taxes
Interest
To indicate the proportion of capital provided by
creditors rather than by owners
Indicates percentage of total assets financed by debt
To measure a firm’s ability to meet fixed interest charges
Dollar and percentages
Percentage Changes
Trend Percentages
Component Percentages
Base year – Comparative Year
Base Year
Comparative Year
Base Year
i.e. Operating expenses
Net Sales
Indicates ability to control different components of the
income statement or balance sheet.
3