financial ratio meanings

Earnings Per Share

Earnings per share (EPS) indicates the amount of income for one share of outstanding common stock. As we have used Net Income in other ratios, the numerator represents the net income available to the common shareholders. Thus, if the company has any preferred stock outstanding, the preferred dividends must be deducted before arriving at Net Income.

Free Cash Flow

Free cash flow reflects the amount of cash available for business activities after allowances for investing (cap ex) and financing (dividends) activity requirements to maintain productive capacity at current levels. Adequate free cash flow allows for growth and financial flexibility.

NCOA

NCOA: Net cash from operating activities from the Cash Flow Statement

Accounts Payable Turnover

The accounts payable turnover ratio indicates the number of times a company pays its average accounts payable during the year. This must be efficiently managed to make use of low cost supplier financing and not to delay payment to the extent that would damage supplier relations.

Accounts Receivable Turnover

The accounts receivable turnover ratio indicates how many times average accounts receivable are collected annually. The longer that receivables are outstanding, the higher the collection risk. Receivables must be managed effectively since they are financed using some cost of capital and entail collection risk.

Asset Turnover

The asset turnover ratio evaluates how efficiently assets are used to produce revenues by comparing revenues to total assets. The ratio is a measure of asset management efficiency and profitability. This calculation is used in the Dupont formulas for Return on Assets and Return on Equity.

Cash Flow Adequacy

The cash flow adequacy ratio evaluates whether cash flow from operating activities is sufficient to cover annual payment requirements. The above ratio is defined to evaluate whether cash flow from operating activities is adequate to maintain productive capacity at current levels. It presents free cash flow information in a ratio format. This ratio (with modifications in the denominator) is used by credit-rating agencies to identify if there is adequate cash coverage of capital expenditures, dividends, debt, and other annual payments.

current ratio

The current ratio measures the ability to pay current payables as they come due. It compares current assets to current liabilities because current assets are generally used to meet current liability obligations. It presents working capital information in a ratio format.

Days Cost in Payables

The days cost in payables ratio indicates the average length of time that accounts payable remain outstanding. It offers the same information as the accounts payable turnover ratio, but presents it in a different format. This formula is also known as Accounts Payable Days.

Days Sales in Inventory

The days sales in inventory ratio indicates the average length of time that inventories are available for sale. It offers the same information as the inventory turnover ratio, but presents it in a different format. This formula is also known as Inventory Days.

Days Sales in Receivables

The days sales in receivables ratio indicates the number of days to convert receivables into cash. It offers the same information as the accounts receivable turnover ratio, but presents it in a different way. This formula is also known as Accounts Receivable Days.

Debt Ratio

The debt ratio measures the proportion of all assets financed by debt by comparing total liabilities to total assets. A higher ratio indicates greater financial risk.

Debt to Equity Ratio

The debt to equity ratio measures the risk of a firm's capital structure by comparing the funds provided by the creditors (debt) with the funds provided by the shareholders (equity). It helps analysts evaluate the trade offs between risk and return. It offers the same information as the debt ratio, but presents it in a different format.

Dividend Amount

The dividend amount indicates the dollar amount of dividends per share paid out over the last 12 months. Most publicly held companies that pay dividends pay on a quarterly basis.

Dividend Payout Ratio

The dividend payout ratio (DPR) provides the measure of the portion of EPS paid out in dividends.

Dividend Yield

The dividend yield indicates the portion of a stock's market value returned to the shareholder in the form of a dividend. It is a measure of dividends paid and helps to evaluate a potential investment.

Equity Multiplier

The financial leverage ratio is one way to measure how leveraged (how much debt) a company has by comparing total assets to total equity. This ratio is also known as the Financial Leverage Ratio and is used in the Dupont formula for Return on Equity. Morningstar.com provides this calculation but they use end of year values rather than averages.

Gross Profit Margin Ratio

The gross profit margin ratio measures the ability of a firm to control the costs of inventory or production. Gross profit (dollars) is the calculation of Revenue minus Cost of Goods Sold. COGS is often the most significant expense for retail and manufacturing companies.

Inventory Turnover

The inventory turnover ratio indicates the number of times a company sells its average inventory level during the year. Inventory is costly in terms of financing and storage, so companies want enough inventory to meet customer demand without stock-outs.

Net Trade Cycle

The net trade cycle measures the number of days in the normal operating cycle that includes purchasing inventory on credit, selling the inventory which creates an accounts receivable, and collecting the cash from the customers. This presentation of the cycle helps analysts understand why cash flow generation from operating activities has improved or deteriorated. The longer the net trade cycle, the larger the working capital requirement. Also referred to as the Cash Conversion Cycle.

Price Earnings Ratio

The price earnings ratio indicates the market price of one dollar of earnings. It expresses the relationship between a company's earnings per share and the market price per common share. It is a measure of shareholder perception and helps to evaluate a potential investment.

Profit Margin Ratio

The profit margin ratio measures the profitability of each dollar of revenue. It expresses net income (bottom line) as a percent of revenue (top line) that represents the firm's ability to translate sales into profits. It measures profitability after deducting all expenses and preferred dividends. This ratio is also known as the Net Profit Margin Ratio and the Return on Sales Ratio. This calculation is used in the Dupont formulas for Return on Assets and Return on Equity.

Quality of Income

The quality of income ratio compares cash flows from operating activities to net income. A ratio higher than 1.0 indicates high quality income because each dollar of net income is supported by one dollar or more of cash. It is cash (not accrual based net income) that is needed to pay suppliers and employees, to invest in income producing assets and to ensure long term success.

Quick Ratio (Acid Test)

The quick ratio compares assets that can be quickly liquidated to current liabilities. It is a more rigorous measure of short-term liquidity than the current ratio. Liquid, by definition, means converting to cash without a loss of value. This ratio is also referred to as the Acid-Test Ratio.

Retention Rate

The retention rate provides the measure of the portion of EPS that is retained by the company. This is also called the Plowback Ratio.

Return on Assets (ROA)

The return on assets ratio measures how efficiently assets are used to produce profits (net income). A high ROA depends on managing asset investments to produce the greatest amount of revenue and controlling expenses to keep net income high. ROA is the most comprehensive measure of profitability of each dollar of revenue.

Return on Equity (ROE)

The return on equity ratio measures how efficiently amounts invested by common shareholders are used to generate profits. The ROE can sometimes be distortedly high because a company has bought back stock (treasury stock).

Times Interest Earned Ratio

The times interest earned ratio reflects the ability to pay interest expense by measuring the number of times EBIT covers interest expense. The fixed interest payments that accompany debt must be satisfied from operating earnings. This ratio is also referred to as the Interest Coverage Ratio.

Working Capital

Working capital is the amount by which current assets exceed current liabilities. It measures the cushion of funds maintained to allow for the uneven flow of working capital.