Common Financial and Accounting Ratios & Formulas

• Part 10.1 - Common Financial & Accounting Ratios and Formulas
• Part 10.2 - Working Capital & Current Ratio
• Part 10.3 - Acid Test (Quick) Ratio
• Part 10.4 - Accounts Receivable Turnover Ratio

Accounting ratios are among the most popular and widely used tools of financial analysis because if properly analyzed, they help us identify areas that require further analysis on financial statements of corporations. A ratio can help us uncover conditions and trends that are difficult to find by inspecting individual components making up the ratio. For instance, knowing how much cash a company has in the bank might be a little useful, but working out a ratio to determine how much cash a company has, versus how much short term debt it has coming up is a lot more useful. Accounting ratios help us do just that. In fact, accountants admit that interpreting financial data is the most challenging aspect of ratio analysis. First of all, what is a ratio?

A ratio is a mathematical relation between two quantities expressed as a percentage, a rate or proportion. For example a ratio can derive the answer $900 or can be expressed a 100% or 9:1 or just “9” In this tutorial, we will go over 4 major categories of accounting ratios that are known as the 4 building blocks of financial statement analysis. They are i) liquidity & efficiency ratios ii) solvency ratios iii) profitability ratios and iv)market value ratios.

i) Short Term Solvency or Liquidity Ratios

Current ratio = Current assets / Current liabilities

Quick ratio = (Current assets – inventory) / Current liabilities

Cash ratio = Cash / current liabilities

Net Working Capital = Net working capital / total assets

Internal measure = Current assets / average daily operating costs

ii) Long Term Solvency or Financial Leverage Ratios

Total debt ratio = (Total assets – total equity) / Total assets

Debt to Equity ratio = Total debt / total equity

Equity Multiplier = Total assets / total equity

Long term debt ratio = Long term debt / (Long term debt + total equity)

Times interest earned = Earnings before Interest & Taxes / Interest

Cash coverage ratio = (Earnings before Interest & Taxes + Depreciation) / Interest

iii) Asset use or turnover ratios

Inventory turnover = Cost of goods sold / Inventory

Days’ sales in Inventory = 365 days / Inventory turnover

Receivables turnover = Sales / Accounts receivable

Days’ sales in receivables = 365 days / Receivables turnover

Net Working Capital (NWC) turnover = Sales / Net Working Capital

Fixed asset turnover = Sales / net fixed assets

Total asset turnover = Sales / total assets

iv) Profitability Ratios

Profit margin = Net income / Sales

Return on Assets (ROA) = Net income / total assets

Return on Equity (ROE) = Net income / Total equity

ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Equity)

v) Market Value Ratios

Price to Earnings ratio = Price per share / Earnings per share

Market-to-book ratio = Market value per share / book value per share