AC 221: Financial Ratios

Gross Margin Ratio

It measures how profitable a company is in selling its inventory or merchandise Gross Margin/Revenue from Sales

EPS

Net Income/Average Shares Outstanding for that Period

Working Capital Ratio

Working Capital Ratio: measures a company's ability to pay off its current liabilities with current assets. The working capital ratio is important to creditors because it shows the liquidity of the company. Current Assets-Current Liabilities/Current Liabilities

Profit Margin Ratio

also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated. Profit Margin/Revenue from Sales

Activity Ratios

measure a company's ability to convert different accounts within its balance sheets into cash or sales

Liquidity Ratios

measure a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the company ability to cover short-term debts.

Financial Risk Ratios

measure a company's capital structure and current risk level as evaluated in relation to the company's debt level.

Profitability Ratios

measure a company's profit as compared to its expenses and other relevant costs incurred during a specific period of time.

Interest Coverage Ratio

measure of a company's ability to handle its short-term financing costs. The ratio value reveals the number of times that a company can make the required annual interest payments on its outstanding debt with its current earnings before taxes and interest.  EBIT/Interest Expense

Asset Turnover

measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales. Sales Revenue/Average Total Assets

Current Ratio

measures a company's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year. Current Assets/Current Liabilities

Accounts Receivable Turnover

measures how many times a business can turn its accounts receivable into cash during a period. Sales Revenue/Average A/R

Inventory Turnover

measures how many times average inventory is "turned" or sold during a period. In other words, it measures how many times a company sold its total average inventory dollar amount during the year Sales Revenue/Average Inventory

Return on Equity (ROE)

measures the ability of a company to generate profits from its shareholders investments in the company Net Income/Average Shareholders Equity

Quick Ratio

measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within in the short-term. Current Assets-Inventory/Current Liabilities

Return on Assets (ROA)

measures the net income produced by total assets during a period Net Income/Average Total Assets

Debt to Capital Ratio

ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders) making the overall business riskier.  Long Term Debt/Total Equity