Download Financial Ratios: A Comprehensive List and Explanation and more Lecture notes Financial Statement Analysis in PDF only on Docsity! List of Financial Ratios Here is a list of various financial ratios. Take note that most of the ratios can also be expressed in percentage by multiplying the decimal number by 100%. Each ratio is briefly described. Profitability Ratios 1. Gross Profit Rate = Gross Profit ÷ Net Sales Evaluates how much gross profit is generated from sales. Gross profit is equal to net sales (sales minus sales returns, discounts, and allowances) minus cost of sales. 2. Return on Sales = Net Income ÷ Net Sales Also known as "net profit margin" or "net profit rate", it measures the percentage of income derived from dollar sales. Generally, the higher the ROS the better. 3. Return on Assets = Net Income ÷ Average Total Assets In financial analysis, it is the measure of the return on investment. ROA is used in evaluating management's efficiency in using assets to generate income. 4. Return on Stockholders' Equity = Net Income ÷ Average Stockholders' Equity Measures the percentage of income derived for every dollar of owners' equity. Liquidity Ratios 1. Current Ratio = Current Assets ÷ Current Liabilities Evaluates the ability of a company to pay short-term obligations using current assets (cash, marketable securities, current receivables, inventory, and prepayments). 2. Acid Test Ratio = Quick Assets ÷ Current Liabilities Also known as "quick ratio", it measures the ability of a company to pay short-term obligations using the more liquid types of current assets or "quick assets" (cash, marketable securities, and current receivables). 3. Cash Ratio = ( Cash + Marketable Securities ) ÷ Current Liabilities Measures the ability of a company to pay its current liabilities using cash and marketable securities. Marketable securities are short-term debt instruments that are as good as cash. 4. Net Working Capital = Current Assets - Current Liabilities Determines if a company can meet its current obligations with its current assets; and how much excess or deficiency there is. Management Efficiency Ratios 1. Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable Measures the efficiency of extending credit and collecting the same. It indicates the average number of times in a year a company collects its open accounts. A high ratio implies efficient credit and collection process. 2. Days Sales Outstanding = 360 Days ÷ Receivable Turnover Also known as "receivable turnover in days", "collection period". It measures the average number of days it takes a company to collect a receivable. The shorter the DSO, the better. Take note that some use 365 days instead of 360. 3. Inventory Turnover = Cost of Sales ÷ Average Inventory Represents the number of times inventory is sold and replaced. Take note that some authors use Sales in lieu of Cost of Sales in the above formula. A high ratio indicates that the company is efficient in managing its inventories. 4. Days Inventory Outstanding = 360 Days ÷ Inventory Turnover Also known as "inventory turnover in days". It represents the number of days inventory sits in the warehouse. In other words, it measures the number of days from purchase of inventory to the sale of the same. Like DSO, the shorter the DIO the better. 5. Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable Represents the number of times a company pays its accounts payable during a period. A low ratio is favored because it is better to delay payments as much as possible so that the money can be used for more productive purposes. 6. Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover Also known as "accounts payable turnover in days", "payment period". It measures the average number of days spent before paying obligations to suppliers. Unlike DSO and DIO, the longer the DPO the better (as explained above). 7. Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding Measures the number of days a company makes 1 complete operating cycle, i.e. purchase merchandise, sell them, and collect the amount due. A shorter operating cycle means that the company generates sales and collects cash faster. 8. Cash Conversion Cycle = Operating Cycle - Days Payable Outstanding CCC measures how fast a company converts cash into more cash. It represents the number of days a company pays for purchases, sells them, and collects the amount due. Generally, like operating cycle, the shorter the CCC the better.
