- Ratio analysis
- Liquidity ratios
- Current Ratio: the primary liquidity ratio.
- Measures a company’s ability to pay short-term obligations with its short-term assets
- Current Ratio = Current assets / current liabilities

- Quick or Acid test ratio
- More stringent liquidity ratio that excludes inventories from current assets to assess a company’s ability to cover short-term liabilities without relying on inventory sales
- Quick or acid test ratio = ( current assets – inventories ) / current liabilities

- Current Ratio: the primary liquidity ratio.
- Asset management ratios
- Inventory turnover ratio
- How efficiently a company manages its inventory by comparing sales to average inventory levels
- Inventory turnover ratio = sales / inventories

- Days sales outstanding
- The average number of days it takes for a company to collect payment after a sale has been made
- Days sales outstanding (DSO)
- = Receivables / Average sales per day
- = Receivables / (Annual sales / 365)

- Fixed assets turnover ratio
- How efficiently a company is using its fixed assets to generate sales
- Fixed assets turnover ratio = Sales / Net fixed assets

- Total assets turnover ratio
- How efficiently a company is using its total assets to generate sales
- Total assets turnover ratio = Sales / Total assets

- Inventory turnover ratio
- Debt management ratios
- Total debt to total capital
- Measure of a company’s financial leverage, indicating the proportion of debt financing relative to its total capital
- Total debt / total capital = total debt / (total debt + equity)

- Times-interest-earned ratio
- Measure of a company’s ability to meet its interest payments, indicating its financial stability and risk level
- Times-interest earned (TIE) ratio = EBIT / Interest charges

- Total debt to total capital
- Profitability ratios
- Operating margin
- Percentage of revenue remaining after deducting operating expenses
- efficiency with which the company operates

- Operating margin = EBIT / Sales

- Percentage of revenue remaining after deducting operating expenses
- Profit margin
- Percentage of revenue that a company retains as profit after accounting for expenses
- efficiency with which the company converts sales into net income

- Profit Margin = net income / sales

- Percentage of revenue that a company retains as profit after accounting for expenses
- Return on total assets
- Measures a company’s ability to generate profit from its assets
- Return on total assets (ROA) = Net income / Total assets

- Return on common equity
- Indicates how well the company is using its capital to generate earnings
- Return on common equity (ROE) = net income / common equity

- Return on invested capital
- Total return that the company has provided for its investors
- Return on invested capital (ROIC) = EBIT( 1-T ) / Total invested capital
- Return on invested capital (ROIC) = EBIT( 1-T ) / ( Debit + equity )

- Basic earning power (BEP) ratio
- Raw earning power of the firm’s assets before the influence of taxes and debt
- Basic earning power (BEP) ratio = EBIT / total assets

- Operating margin
- Market value ratios
- Price/earning ratio
- Shows how much investors are willing to pay per share per dollar of reported profits
- Price/earning ratio (P/E)(PE) = price per share / earnings per share

- Market/book ratio
- Shows how investors value the company
- Market/book ratio = common equity / shares outstanding
- = market price per share / book price per share

- Enterprise value/ ebitda ratio
- Looks at the relative market value of all the company’s key financial claims
- Enterprise value = market value of equity + market value of total debt + market value of other financial claims – cash and equivalents

- Price/earning ratio
- Dupont equation
- Return on equity (ROE) = Return on assets (ROA) * Equity multiplier
- ROA = Profit margin * Total assets turnover
- Equity multiplier = Total assets / Total common equity
- Profit margin= Net income / sales

- Like all other ratios, ROE is not the whole picture and maximizing it isn’t necessarily the best thing for stakeholders.
- Economic value added
- A measure of how much management has added to shareholders’ wealth during the year
- Economic value added (EVA) = EBIT(1-T) – (Total invested capital * After-tax cost of capital)

- Economic value added
- Using these financial ratios to assess performance
- Comparison to industry averages
- Compare these ratios to industry averages to rate the firm (ie poor, ok, risky, etc)

- Benchmarking
- Compare each metric in a list alongside competitors to show performance of the firm

- Trend analysis
- Compare the metrics over time to competitors to show whether the numbers are getting better or worse for each

- Comparison to industry averages
- Uses and limitations of ratios
- Managers use these ratios to analyze and control performance
- Creditors use these ratios to determine availability of credit and debt
- Stock analysts use these ratios to determine whether to buy or sell a firm’s shares

- Looking beyond the numbers
- Financial analysis metrics are not the whole picture of the company

- Liquidity ratios