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Ratio Analysis

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Regardless of the size of your business, setting up and maintaining your Accounting/Financial information is vitally important to the success of your business.

A organization's Financial Statements can reveal more than just bottom line. Using the data from your company's Balance Sheet and Income Statement, you can effectively analyze the Liquidity, Efficiency, and Profitability of your business. This is better known as Ratio Analysis.

Financial Ratios Calculator

See the Formulae used to compute the ratios.

Company Name:
Year:
Data From Balance Sheet
Cash & Equivalents
Net Receivables / Trade Receivables
Inventory
Total Current Assets:
Fixed Assets
Intangible Assets
Goodwill
Total Assets:
Current Position on Long Term Debt
Accounts Payable / Trade Payables
Total Current Liabilities:
Total Liabilities
Total Stockholders Equity
Data from Earnings / Income / Operations Statement
Net Sales
Cost of Sales
Annual Interest Expense
Earnings Before Interest & Taxes
Net Profit After Taxes
Data from Cash Flow Statement
Depreciation and Amortization

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Ratio Formulae

Ratio	Formula
Current Ratio	Total Current Assets ÷ Total Current Liabilities
Quick (Acid Test) Ratio	(Cash + Net Receivables) ÷ Total Current Liabilities
Current Liabilities to Net Worth	Total Current Liabilities ÷ Net Worth ¹
Current Liabilities to Inventory	Total Current Liabilities ÷ Inventory
Sales to Receivables	Net Sales ÷ Net Receivables
Days' Receivables	365 ÷ (Net Sales ÷ Net Receivables)
Cost of Sales to Inventory	Cost of Sales ÷ Inventory
Days' Inventory	365 ÷ (Cost of Sales ÷ Inventory)
Cost of Sales to Payables	Cost of Sales ÷ Accounts Payable
Days' Payables	365 ÷ (Cost of Sales ÷ Accounts Payable)
Total Liabilities to Net Worth	Total Liabilities ÷ Net Worth
Total Liabilities to Tangible Net Worth	Total Liabilities ÷ (Net Worth - Intangible Assets - Goodwill)
Fixed Assets to Net Worth	Fixed Assets ÷ Net Worth
Fixed Assets to Tangible Net Worth	Fixed Assets ÷ (Net Worth - Intangible Assets - Goodwill)
Collection Period	(Net Receivables ÷ Net Sales) * 365
Sales to Inventory	Net Sales ÷ Inventory
Sales to Fixed Assets	Net Sales ÷ Fixed Assets
Sales to Total Assets	Net Sales ÷ Total Assets
Assets to Sales	Total Assets ÷ Net Sales
Sales to Net Working Capital	Net Sales ÷ (Current Assets - Current Liabilities)
Accounts Payable to Sales	Accounts Payable ÷ Net Sales
% Profits Before Taxes to Tangible Net Worth	(Earnings Before Taxes ÷ (Net Worth - Intangible Assets - Goodwill))*100
% Profit Before Taxes to Total Assets	(Earnings Before Taxes ÷ Total Assets)*100
Return on Sales (Profit Margin)	Net Profit ÷ Net Sales
Return on Assets	Net Profit ÷ Total Assets
Return on Net Worth (Return on Equity)	Net Profit ÷ Net Worth
Earnings Before Interest & Taxes (EBIT) to Interest	Earnings Before Interest & Taxes ÷ Interest Expense
¹ Net Worth is defined as the value of Total Stockholders Equity

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Liquidity Ratios

Current Ratio = Current Assets
                                Current Liabilities

Measures the dollars available to cover current debt. A ratio of 1 or greater means that a business will be able to cover their current obligations.

Quick Ratio = Cash + Marketable Securities
                                Current Liabilities

If your business maintains inventory you also need to use this ratio.    Especially, if the Current Ratio is at right at 1.

Depending on your business the inventory may be more difficult to sell.

Though these ratios match current assets with current liabilities, it assumes that all the current assets will be used to pay the current liabilities.

Defensive-Interval Ratio gives a more realistic picture of a business' ability to meet current obligations.

This ratio is calculated by dividing Defensive Assets (ie cash, marketable securities, net receivables) by the projected daily expenditures from operations. To calculate projected daily expenditures add Cost of Goods Sold, selling and administrative expense, and other ordinary expenditures. Then divide that number by 365.

Defensive-Interval Ratio =
(Cash+ Marketable Securities+ Net Receivables )÷(Cost of Goods Sold + Selling & Administrative Expense + Other Ordinary Expense)/365

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Efficiency Ratios

Efficiency Ratios measure how well a company utilizes its assets and manages its debt.

Asset Management How quickly are your outstanding receivables being collected? How often is your inventory turning over? Are you carrying too much inventory? These questions can't be answered simply by reviewing your Balance Sheet. You can, though, put your Balance Sheet to use by calculating how efficiently you are using your assets.

To determine the rate which Accounts Receivables are collected use the following calculation:

Receivable Turnover = Net Sales ÷ Average Net Accounts Receivable

Net Sales should be (if it can be determined) the Net Credit Sales. The results of the calculation is the number of days to collect outstanding accounts. If the results of this ratios shows that these are turned over quickly then the Acid Test and Current Ratio are a reliable measure of meeting current obligations.

Inventory Turnover measures how quickly inventory is sold. In general, the higher the turnover ratio the better the company is performing. This is calculated by dividing the cost of goods sold by average inventory.

Inventory Turnover = Cost of Goods Sold
                                            Average Inventory

The next step is to divide the inventory turnover by 365 days. This will give you the average number of days it takes to sell inventory.

Asset Turnover is an indicator of how efficiently a firm utilizes its assets. It is calculated by dividing Net Sales by Average Total Assets. If the ratio is high it implies that the firm is using its assets efficiently.

Asset Turnover =        Net Sales
                                  Average Total Assets

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Profitability Ratios

Profitability Ratio indicate how well a firm has operated during the year.

Profit Margins on Sales indicates the rate of profit on each sales dollar received.    For example, if profit margin is 8% this would indicate that $0.08 on every dollar of sales is profit.

Profit Margin on Sales = Net Income
                                                  Net Sales

Return on Assets is calculated by dividing Net Income by Average Total Assets. The higher the percentage rate that a company has the better. This means the company is receiving a higher rate return the from its investment in these assets.

Return on Assets =          Net Income
                                          Average Total Assets

If your company is publicly traded you may be interested in the Rate of Return on Common Stock. This is calculated by:

= Net Income minus Preferred Dividends
      Average Common Stockholders Equity

This indicates the rate of return for your stockholders.

For investment purposes Earnings Per Share (EPS) and Price Earning Ratio (P/E) can help you determine is a particular stock is a good investment. SEC requires that companies report the Fully Diluted Earnings Per Share. A fully diluted EPS assumes all warrants and convertibles have been exercised or converted regardless of the likelihood of this occurring.

EPS =            Earnings Available to Stockholders
              Actual Average Number of Shares Outstanding

The Price Earnings Ratio indicates the growth potential and risk of a company. The higher the P/E ratio for a company the greater the potential is for growth. The lower the ratio indicates the firm has more risk.

Another Ratio that Investment Analyst use is the Market/Book Ratio(M/B). This ratio is an indicator of how other investors regard the company. A company with a high rate of return on equity have higher Market/Book Ratio.

(M/B) = Market Price per Share
                  Book Value per Share

Book Value per Share is calculated:    Common Equity
                                                                  Shares Outstanding

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