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SUMMARY OF FINANCIAL ACCOUNTING RATIO
PROFITABILITY RATIO:
| Financial Ratio |
Formula |
Measurements |
| Return on Total Assets |
Operating profit before income tax + interest expense/ Average total assets |
Measures rate of return earned through operating total assets provided by both creditors and owners |
| Return on ordinary shareholders’ equity |
Operating profit & extraordinary items after income tax minus Preference dividends / Average ordinary shareholders’ equity |
Measures rate of return earned on assets provided by owners |
| Gross Profit Margin |
Gross Profit / Net Sales |
Profitability of trading and mark-up |
| Profit Margin |
Operating profit after income tax / Net Sales Revenue |
Measures net profitability of each dollar of sales |
MARKET BASED FINANCIAL RATIO:
| Financial Ratio |
Formula |
Measurements |
| Earnings per share |
Operating profits after income tax less Preference dividends / Weighted average number of ordinary shares issued |
Measures profit earned on each ordinary share |
| Price-earnings ratio |
Market price per ordinary share / Earnings per ordinary share |
Measures the amount investors are paying for a dollar of earnings |
| Earning Yield |
Earnings per ordinary share / Market price per ordinary share |
Measures the return to an investor purchasing shares at the current market price. |
| Dividend Yield |
Annual dividend per ordinary share / Market price per ordinary share |
Measures the rate of return to shareholders based on current market price. |
| Dividend Payout |
Total dividend per ordinary share / Market price per ordinary share |
Measures the percentage of profits paid out to ordinary shareholders |
| Net Asset Backing (NTA) |
Ordinary shareholders’ equity / No of ordinary shares |
Measure the assets backing per share |
LIQUIDITY RATIO:
| Financial Ratio |
Formula |
Measurements |
| Current Ratio |
Current Assets / Current liabilities |
A measure of short-term liquidity. Indicates the ability of entity to meet its short-term debts from its current assets |
| Quick Ratio |
Current Assets less inventory / Current liabilities |
A more rigorous measure of short-term liquidity. Indicates the ability of the entity to meet unexpected demands from liquid current asses |
ASSET MANAGEMENT/UTILISATION/ACTIVITY RATIOS:
| Financial Ratio |
Formula |
Measurements |
| Receivables turnover |
Net sales revenue / Average receivables balance |
Measures the effectiveness of collections; used to evaluate whether receivables balance is excessive |
| Average collection period |
Average receivables balance x 365 / Net sales revenue |
Measures the average number of days taken by an entity to collect its receivables |
| Inventory turnover |
Cost of goods sold / Average inventory balance |
Indicates the liquidity of inventory. Measures the number of times inventory was sold on the average during the period |
| Total Asset turnover ratio |
Net sales revenue / Average total assets |
Measures the effectiveness of an entity in using its assets during the period. |
| Turnover of Fixed Assets |
Net Sales / Fixed Assets |
Measure the efficiency of the usage of fixed assets in generating sales |
GEARING/FINANCIAL STABILITY RATIO:
| Financial Ratio |
Formula |
Measurements |
| Debt ratio |
Total Liabilities / Total assets |
Measures percentage of assets provided by creditors and extent of using gearing |
| Equity ratio or Proprietary ratio |
Total shareholders’ equity / Total assets |
Measures percentage of assets provided by shareholders and the extent of using gearing |
| Capitalization ratio |
Total assets / Total shareholders’ equity |
The reciprocal of the equity ratio and thus measures the same thing |
| Times interest earned |
Operating profit before income tax + Interest expense / Interest expense + Interest capitalized |
Measures the ability of the entity to meet its interest payments out of current profits. |
CASH SUFFICIENCY RATIO:
| Financial Ratio |
Formula |
Measurements |
| Cash flow adequacy |
Cash from operations / Long-term debt paid + Assets acquired + Dividends paid |
Measures the entity’s ability to cover its main cash requirements |
| Long-term debt repayment |
Long-term debt repayments / Cash from operations |
Measures the entity’s ability to cover its long-term debt out of cash from operations |
| Dividend payment |
Dividends paid / Cash from operations |
Measures the entity’s ability to cover its dividend payment |
| Reinvestment |
Non-current asset payments / Cash from operations |
Measures the entity’s ability to pay for its non-current assets out of cash from operations |
| Debt coverage |
Total long-term debt / Cash from operations |
Measures the payback period for coverage of long-term debt. |
CASH FLOW EFFICIENCY RATIO:
| Financial Ratio |
Formula |
Measurements |
| Cash flow to sales |
Cash from operations / Net sales revenue |
Measures ability to convert sales revenue into cash flows |
| Operation index |
Cash from operations / Operating profit after income tax |
An index measuring the relationship between profit from operations and operating cash flows |
| Cash flow return on assets |
Cash from operation + Tax paid + Interest paid / Average total assets |
Measures the operating cash flow return on assets before interest and tax |
FORECAST BANKRUPTCY RATIO:
| Refer to Altman Z’s Financial Ratio |
Each financial ratio is linked to the respective topic in this blog to provide more details for the readers.
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