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Financial ratio
From Wikipedia, the free encyclopedia
In finance, a financial ratio or accounting ratio is a ratio of selected values on an enterprise's financial statements. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a firm, by current and potential stockholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Values used in calculating financial ratios are taken from the balance sheet, income statement, cash flow statement and (rarely) statement of retained earnings. These comprise the firm's "accounting statements" or financial statements.
Ratios are always expressed as a decimal value, such as 0.10, or the equivalent percent value, such as 10%.
Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.[5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.[6]
Financial ratios allow for comparisons
- between companies
- between industries
- between different time periods for one company
- between a single company and its industry average
The ratios of firms in different industries, which face different risks, capital requirements, and competition are not usually comparable.
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Financial ratios are based on summary data presented in financial statements. This summary data is based on the accounting method and accounting standards used by the organization.
Finanial ratios may not be directly comparable between companies that use different accounting methods or follow various standard accounting practices. Most public companies are required by law to use generally accepted accounting principles for their home countries, but private companies, partnerships and sole proprietorships may not use accrual basis accounting. Large multi-national corporations may use International Financial Reporting Standards to produce their financial statements, or they may use the generally accepted accounting principles of their home country.
There is no world-wide standard for calculating the summary data presented in all financial statements, and terminology is not always consistent between companies, industries, countries and time periods.
Various abbreviations may be used in financial statements, especially financial statements summarized on the Internet. Sales reported by a firm are usually, technically, net sales, which deduct returns, allowances, and early payment discounts from the charge on an invoice.
Companies that are primarily involved in providing services based on man-hours do not generally report "Sales" based on man-hours. These companies tend to report "revenue" based in income from services provided.
Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.
- Gross margin
- Profit margin
- Operating margin or Operating income margin = Operating income / Net sales[7]
- Net margin
- Gross profit margin or Gross profit rate = (Net sales - Cost of goods sold) / Net sales[8]
- Operating profit margin or Return on Sales (ROS)
- = Earnings before interest and taxes / Sales[9][10]
- = Operating earnings / Net sales[11]
- Net profit margin = Net profits after taxes / Sales[12]
- Return on equity (ROE)
- = Net profits after taxes / Stockholders' equity or tangible net worth [13]
- = Net profit / Equity[14]
- Return on investment (ROI ratio or Du Pont ratio) = Net income / Total assets[15]
- Asset turnover = Sales / Assets[16]
- Return on assets (ROA)
- Return on net assets (RONA)
- Return on capital (ROC)
- Risk adjusted return on capital (RAROC)
- Return on capital employed (ROCE)
- Cash flow return on investment (CFROI)
- Efficiency ratio
Liquidity ratios measure the availability of cash to pay debt.
- Current ratio = Current assets / Current liabilities[17]
- Acid-test ratio (Quick ratio) = (Current assets - Inventories) / Current liabilities[18]
Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
- Average collection period = Accounts receivable / (Annual credit sales / 360 days)[19]
- Collection period (period end)
- Average payment period = Accounts payable / (Annual credit purchases / 360 days)[20]
- Inventory turnover ratio = Cost of goods sold / Average inventory[21]
- Inventory conversion ratio = Inventory conversion to cash period (days) = 360 days / Inventory turnover[22]
- days Inventory
Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial leverage.
- Debt ratio = Total liabilities / Total assets [23]
- Debt to assets ratio
- Debt to equity ratio = (Long-term debt + Value of leases) / Stockholders' equity[24]
- Long-term debt/Total asset (LD/TA) ratio = long-term debt / Total assets[25]
- Times interest-earned ratio = Earnings before interest and taxes EBIT / Annual interest expense[26]
- Overall coverage ratio = Cash inflows divided by
-
- Lease expenses plus
- Interest charges plus
- Debt repayment / (1-t) plus
- Preferred dividend / (1-t)
- Debt service coverage ratio = Net operating income / Total debt service
Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.
- Payout ratio = Dividend / Earnings[27], or
- = Dividend per share / Earnings per share[28]
- Note:Earnings per share is not a ratio, it is a value in currency. Earnings per share = Expected earnings / Number of outstanding shares[29]
- P/E ratio = Price / Earnings per share
- Cash flow ratio or Price/cash flow ratio = Price of stock / present value of cash flow per share[30]
- Price to book value ratio (P/B or PBV) = Price of stock / Book value per share[31]
- Price/sales ratio
- PEG ratio
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This section does not cite any references or sources. Please improve this section by adding citations to reliable sources. Unverifiable material may be challenged and removed. (July 2007) |
- Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) (Interest coverage ratio)
- Payback period: How many years of operating earnings are needed to pay off the debt : Debt/EBITDA
- Operating leverage
1. Percentage Gross Profit on Turnover = (Gross Profit) / (Sales) x 100.
2. Percentage Gross Profit on Cost of Sales = (Gross Profit) / (Cost of Sales) x 100.
3. Percentage Net Income on Turnover = (Net Income) / (Sales) x 100.
4. Percentage Total Expenses on Turnover = (Total Expenses) / (Sales) x 100.
5. Percentage Operating Profit on Turnover = (Operating profit) / (Sales) x 100.
6. Percentage Operating Profit on Cost of Sales = (Operating Profit) / (Cost of Sales) x 100.
7. Net Assets = (Total Assets) - (Total Liabilities).
8. Solvency Ratio = (Total Assets) / (Total Liabilities).
9. Net Current Assets = (Current Assets) - (Current Liabilities).
12. Rate of Stock Turnover = (Cost of Sales) / (Average Stock).
13. Period for which Ample Stock is on Hand = (Average Stock) / (Cost of Sales) x (365 days or 12 months).
14. Debtors Average Collection Period = (Average Debtors) / (Credit Sales) x (365 days or 12 months).
15. Creditors Average Payment Period = (Average Creditors) / (Credit Purchases) x (365 days or 12 months).
16. Debt/Equity Ratio = (Total Liabilities) / (Shareholders Equity). This is also known as Risk or Gearing, the extent to which a company is financed by borrowed funds; for example, if a company is highly geared, it borrows a lot.
17. Return on Total Capital Employed = ((Net Profit before Tax) + (Interest on Loan)) / (Average Capital Employed) x 100.
18. Return on Shareholders' Equity = (Net Profit after Tax) / (Average Shareholders' Equity) x 100.
19. Earnings per Share = (Net Profit after Tax) / (Number of Shares Issued) x 100.
20. Dividends per Share = (Dividends on Ordinary Shares) / (Number of Shares Issued) x 100.
21. Net Asset Value per Share = (Shareholders' Equity) / (Number of Shares Issued) x 100.
22. Net Profit before Tax on Turnover = (Net Profit before Tax) / (Turnover) x 100.
- ^ Groppelli, Angelico A.; Ehsan Nikbakht (2000). Finance, 4th ed. Barron's Educational Series, Inc., 433. ISBN 0764112759.
- ^ Groppelli, p. 434.
- ^ Groppelli, p. 436.
- ^ Groppelli, p. 439.
- ^ Groppelli, p. 442.
- ^ Groppelli, p. 445.
- ^ Williams, Jan R.; Susan F. Haka, Mark S. Bettner, Joseph V. Carcello (2008). Financial & Managerial Accounting. McGraw-Hill Irwin, p. 266. ISBN 9780072996500.
- ^ Williams, P. 265.
- ^ Groppelli, p. 443.
- ^ Bodie, Zane; Alex Kane and Alan J. Marcus (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin, 459. ISBN 0072510773.
- ^ Williams, p. 1094.
- ^ Groppelli, p. 444.
- ^ Groppelli, p. 444.
- ^ Bodie, p. 456.
- ^ Groppelli, p. 445.
- ^ Bodie, p. 459.
- ^ Groppelli, p. 435.
- ^ Groppelli, p. 435.
- ^ Groppelli, p. 436.
- ^ Groppelli, p. 436.
- ^ Groppelli, p. 438.
- ^ Groppelli, p. 439.
- ^ Groppelli, p. 440; Williams, p. 640.
- ^ Groppelli, p. 441.
- ^ Groppelli, p. 441.
- ^ Groppelli, p. 441.
- ^ Groppelli, p. 446.
- ^ Groppelli, p. 449.
- ^ Groppelli, p. 446.
- ^ Groppelli, p. 447.
- ^ Groppelli, p. 447.
- On the Classification on Financial Ratios., (1990)
- A Review of the Theoretical and Empirical Basis of Financial Ratio Analysis, (1994)
- The Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Revisited, (2005)
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