KEY FINANCIAL STATEMENT RATIOS Liquidity ratios Example: A "2.0 to 1" ratio means that there is If current liabilities are rising faster Current Ratio Current Assets 2.0 to 1 $2.00 of current assets for every $1 than the current assets from which Current Liabilities in current liabilities, which suggests they must be paid, company could that short-term creditors can be become insolvent (unable to pay reasonably sure of being paid. its debts) and eventually bankrupt. Quick Ratio Quick Assets * 0.9 to 1 Indicates extent to which claims of If Current Ratio is OK, but Quick Ratio "Acid Test" Current Liabilities short-term creditors are covered by is low or declining, the cause may "quick" assets*. be excessive nonliquid inventory. * Quick assets include Cash, Marketable Securities, and Accounts Receivable (excludes Inventory) Asset Management Ratios Number of times merchandise Low or declining turnover suggests Inventory Cost of Goods Sold* 4.0 times items are sold and restocked excessive inventory, or possibly Turnover Inventory ("turned over") per year. obsolete or otherwise overstated inventory. * Some publications use "Sales" as the numerator, and /or average inventory as denominator Receivable Sales 8.0 times Number of times goods or services Low or declining turnover suggests Turnover Accts Receivable are sold and paid for per year. credit and collection policies may "Number of days to collect" = need to be strengthened, or possibly 365 /Receivable Turnover ratio overstated receivables. Debt (Leverage) (Long-term Solvency) Ratios Debt to Total Liabilities 0.50 The portion of the total financing Debt to Assets and Debt to Equity Assets Total Assets supplied by creditors as opposed to are alternative benchmarks that the owner-stockholders. measure long-term solvency. Higher ratios (high leverage ) mean greater Debt to Total Liabilities 1.5 The financing supplied by creditors risk that cash flows from operations Equity Total Equity as compared to financing supplied will be insufficient to cover interest by the owner-stockholders. and principal payments. Times interest EBIT* 3.2 Measures the extent to which operat-Low ratio = low margin of safety, Earned Interest expense ing income can decline before firm is and can make it difficult to borrow. unable to meet interest payments * EBIT means "Earnings before Interest and Taxes" Profitability Ratios (not applicable if net loss) Profit Margin Net Income 5.1% Net income as a percentage of sales. Low percentage = low safety on Sales (%) Sales (net) If trend is down, product costs and/or margin: higher risk that a decline in operating expenses are rising faster sales will erase profits and result than sales. in a net loss. Gross Profit Gross Profit 35.2% Gross Profit as a percentage of sales. A low or declining Gross Profit % on Sales (%) Sales (net) If low or declining, product costs may indicates less ability to sell goods be increasing and/or selling prices at intended selling price, or rising decreasing (steeper discounts). cost of goods, or both. Return Operating Income* 15.3% Measures how well management A low or declining rate could mean on Assets (%) Total Assets is managing assets to generate that assets are not being utilized aka ROI profit from operations. effectively. Return Net Income ** 18.4% Measures rate of return on stockholders Low return could be caused by high on Equity (%) Equity *** investment. (However, "dividend yield" debt i.e., high interest expense. for stockholders is generally much less.) ** If preferred stock exists, subtract Preferred Dividends from Net Income; *** also subtract Preferred Stock from Total Equity Market Value Ratios Earnings per Net Income * $1.23 EPS is the "real" measure of profitability EPS can decline despite an Share (EPS) Common shares outstanding used by potential investors (not used increase in total earnings, and thus by creditors). drive down the market price per * If preferred stock exists, subtract Preferred Dividends from Net Income. share. Price/Earnings Market Price 16.5 times The multiple-times-earnings that High P/E ratio means that investors Ratio (P/E) EPS * investors are willing to pay, based perceive good growth potential --but on anticipated future EPS. they could be (and often are) wrong. * If EPS is negative, ratio is "not applicable"KEY FINANCIAL STATEMENT RATIOS THIS YEAR LAST YEAR Industry Amounts Answer Amounts Answer Average Liquidity ratios Current Ratio Current Assets = = = Current Liabilities Quick Ratio, or Quick Assets * "Acid Test" Current Liabilities * Quick assets include Cash, Marketable Securities, and Accounts Receivable Asset Management Ratios Inventory Cost of Goods Sold Turnover Inventory Receivable Sales Turnover Accts Receivable Debt (Leverage) (Long-term Solvency) Ratios Debt to Total Liabilities Assets Total Assets Debt to Total Liabilities Equity Total Equity Times interest EBIT* Earned Interest expense * EBIT means "Earnings before Interest and Taxes" Profitability Ratios (not applicable if net loss) Profit Margin Net Income on Sales (%) Sales Gross Profit Gross Profit on Sales (%) Sales Return Net Income on Assets (%) Total Assets Return Net Income on Equity (%) Equity Market Value Ratios Earnings per Net Income Industry avg. Share (EPS) No. shares outstanding not relevant Price/Earnings* Market Price Ratio (P/E) EPS * P/E ratio changes daily with market price. If EPS is negative, ratio is "not applicable". Use "Basic" , not "Diluted". prior year not required