# 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

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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