Financial Ratios Formulas and Explanations Leverage Ratios Total Debt Total by ramhood16

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									                  Financial Ratios – Formulas and Explanations
                         Leverage Ratios
     Total Debt          Debt-to-Asset
                         Compares total debt to total assets.
    Total Assets         Expresses what percentage of assets is being financed by debt vs. equity
                         The higher the number, the more risk is being assumed by lenders.

     Total Debt          Debt-to-Equity
                         Expresses how much of the business was financed by debt vs. owner investment.
    Total Equity         An acceptable range is 1:1 to 4:1 with most lenders looking for around 2:1.
                         Too much debt puts the business at risk, not enough may limit profitability.

                         Liquidity Ratios

   Current Assets        Current Ratio
                         Expresses the relationship between current assets and current liabilities.
 Current Liabilities     Measures your ability to pay current liabilities
                         Should be greater than 1:1; goal should be 2:1

      Inventory          Inventory to Net Working Capital
                         Measures what proportion of working capital is made up of inventory.
C Assets–C Liabilities   If number is too high it could indicate a liquidity problem.


                         Quick Ratio
 C Assets-Inventory
                         Expresses the relationship between current assets minus inventory and current liabilities.
 Current Liabilities     Measures your ability to pay current liabilities with liquid assets
                         Goal should be 1:1 – means you don’t need to sell inventory to meet current obligations

                         Operations Ratios
                         Accounts Receivable Turnover
  Net Credit Sales
                         Measures number of times per year the receivable account revolves
Avg. Accts Receivable    Expresses the liquidity of your receivables
                         The higher the number, the shorter the time between a sale and payment

                         Asset Utilization
      Net Sales          Measures how many sales dollars are generated by each dollar investment in assets
    Total Assets         Shows how efficiently your assets are being used.


                         Average Collection Period
365 x Avg. Accts Rec     Indicates the number of days it takes to get paid
  Net Credit Sales       Compare to your industry
                         You may be too lenient in your collection procedures or payment terms

                         Average Days Payable
365 x Avg. Accts Pay     Indicates the number of days it takes you to pay your bills
Net Credit Purchases     Compare to supplier terms
                         If you stretch suppliers unreasonably, you may not be able to count on them in a pinch

365 x Avg. Inventory     Days of Sale in Inventory
                         Indicates how many days you could go without purchasing any further inventory
       COGS              Too many indicates you have too much inventory
                         Too little means you are probably missing sales due to stock-outs
                         Fixed Asset Utilization
      Net Sales          Measures how many sales dollars are generated by each dollar investment in equipment,
    Fixed Assets         land and buildings
                         Shows how efficiently your investment in big ticket items is performing

                         Inventory Turnover
       COGS              Measures how many times per year your inventory revolves
 Average Inventory       Too low indicates you have too much inventory
                         Too high means you are probably missing sales due to stock-outs
                         Compare to your industry averages

 Total Annual Sales      Sales per Employee
                         Measures effectiveness of the contribution of your staff to sales.
Avg. # of Employees
                         You can compare the average to each person’s sales as a form of evaluation

                         Profitability Ratios
Net Income-Pref Div      Earnings per Share
                         Indicates annual profit generated by each common share in a corporate structure
 # Common Shares         Can compare with various markets

                         Net Profit Margin
     Net Profit          Indicates how much is left after all expenses and taxes have been paid.
   Net Total Sales       Indicated as a percentage of sales
                         From every sales dollar, how much is left?

 Profit-Tax-Interest     Return on Shareholder Equity
                         Compares annual profit per share versus share price.
 Shareholder Equity
                         For a business owner it indicates how much his/her investment returns as a %

     Net Profit          Return on Total Assets
                         Compares total annual profit to total assets
    Total Assets         Measures efficiency of assets in producing income


Profit Before Int&Tax    Debt Coverage Ratio
                         Measures how well your business covers debt and how easily it could handle more debt
Tot Bank Fees&Interest   Very important to lenders

								
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