FINANCIAL RATIOS DEFINITIONS
Use these ratios to gauge your solvency, liquidity, operational efficiency and profitability. They are also useful measures to compare your business with others in your industry. Profitability Ratios Gross profit margin Formula: Gross profit/Sales
This important ratio measures your profitability at the most basic level. Your total gross profit total ( which is net sales - cost of goods sold) compared to your net sales . A ratio less than one means you are selling your product for less than it costs to produce. If this ratio is remains less than one, you will not achieve profitability regardless of your volume or the efficiency of the rest of your business. Operating profit margin Formula: Operating income/Sales
This ratio measures your profitability based on your earnings before interest and tax (EBIT). This measure is used to gauge the efficiency of the business before taking any financing means into account (such as debt financing and tax considerations). This ratio is often used to compare the operating efficiency between similar businesses. Net profit margin Formula: Net income/Sales
Often referred to as the bottom line, this ratio takes all expenses into account including interest. Liquidity Ratios Current ratio Formula:Current assets/Current liabilities
Your current ratio helps you determine if you have enough working capital to meet your short term financial obligations. A general rule of thumb is to have a current ratio of 2.0. Although this will vary by business and industry, a number above two may indicate a poor use of capital. A current ratio under two may indicate an inability to pay current financial obligations with a measure of safety. Quick ratio Formula: (Current assets - Inventory)/Liabilities
Also known as the 'Acid Test', your Quick Ratio helps gauge your immediate ability to pay your financial obligations. Quick Ratios below 0.50 indicate a risk of running out of working capital and a risk of not meeting your current obligations. While industries and businesses vary widely, 0.50 to 1.0 are generally considered acceptable Quick Ratios. Operating Ratios Inventory turnover ratio Formula: Cost of goods sold/Inventory
This ratio measures the number of times your inventory 'turned-over' during a time period. Generally, the higher this ratio the better your use of inventory. Low numbers indicate a large amount of capital tied up in inventory that may be more efficiently used elsewhere. Sales to receivables ratio Formula: Net sales/Net receivables
This ratio measures the number of times your receivables 'turned over'. The higher the number, the more efficient you are at collecting your accounts receivable. A ratio that is too high or one that is increasing over time, may indicate an inefficient use of your working capital. It is important to compare this ratio to other businesses in your industry. Times interest earned Formula: Profit before interest and taxes/Total int. charges
TIE may be used by bankers to assess your ability to pay your liabilities. The TIE ratio determines how many times during the year your business has earned the annual interest costs associated with servicing its debt. Your banker will be looking for your TIE ratio to be 2.0 or greater, showing that your business is earning the interest charges two or more times each year. Return on assets Formula: Net income before taxes/Total assets at beginning of period
This ratio helps show how assets are being used to generate profits. One of the most common financial measures, it can be an effective tool to compare the profitability of two companies. If your return on assets is lower than a competitor, it may be an indication that they have found a more efficient means to operate through financing, technology, quality control or inventory management. Return on equity Formula: Net income/Net worth at beginning of period
Return On Equity is often used to determine if a company consumes cash or creates assets. Return On Equity can also help you evaluate trends in a business. And ROE can also be used to compare the performance between companies in the same industry. Return on investment (ROI) ratio The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of business management. Solvency Ratios Debt to worth ratio Formula:Total liabilities/Net worth
Also called the leverage ratio, it is used to help describe how much debt is used to finance the business. While some debt may be prudent, depending on too much debt financing can increase risk. Working capital Formula: Current assets - Current liabilities
Working capital is used by a lender to help gauge the ability of a company to weather difficult financial periods. Working capital is calculated by subtracting current liabilities from current assets. Due to differences in businesses and the fact that working capital is not a ratio but an absolute amount, it is difficult to predict the ideal amount of working capital for your business without making use of other financial measures. (Including the Quick Ratio and the Current Ratio.)
FINITIONS
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FINANCIAL RATIOS CALCULATOR
Use this worksheet to calculate your financial ratios from period to period. This Ratio Calculator will help you track financial trends in your business. To use, just insert the requested values and the Ratios will be automatically calculated for you.
Note: Calculations may not work properly if both numbers are negative. Numbers that appear in ( ) are negative.
Profitability Ratios Gross Profit Gross profit margin Gross Profit Sales 45.00
Operating Income Operating profit margin Operating Income Sales 17.00
Net Income Net profit margin Net Income Sales 12.50
Liquidity Ratios Current Assets Current ratio Current Assets Current Liabilities 115.00
Cash & Near Cash Quick ratio Current Assets - Inventory Liabilities 85.00
Operating Ratios Cost of Goods Sold Inventory turnover ratio Cost of Goods Sold Inventory 45.00
Net Sales Sales to receivables ratio Net Sales Net Receivables 95.00
Profit Before Int. & Tx Times interest earned Profit Before Interest and Taxes Total Interest Charges 19.00
Net Income Before Tx Return on assets Net Income Before Taxes Total Interest Charges 17.00
Net Income Return on equity Net Income Net Worth at Beginning of Period 12.50
Solvency Ratios Total Liabilities Debt to worth ratio Total Liabilities Net Worth 125.00 Current Assets 115.00
Working capital
Current Assets - Current Liabilities
CULATOR
negative.
Sales 100.00 45.00%
Sales 100.00 17.00%
Sales 100.00 12.50%
Current Liabilities 45.00 2.56
Liabilities 125.00 0.68
Inventory 30.00 1.50
Net Receivables 15.00 6.33
Interest Charges 2.00 9.50
Interest Charges 2.00 8.50
Net Worth at Begin. 45.00 27.78%
Net Worth 57.50 Current Liabilities 45.00 2.17
70.00
FINANCIAL RATIOS EVOLUTION CALCULATOR
Use this worksheet to calculate your financial ratios from period to period. This Ratio Calculator will help you track financial trends in your business. To use, follow the formulas provided.
Note: Calculations may not work properly if both numbers are negative.
Period 1 Profitability Ratios Gross profit margin Gross Profit Sales Operating Income Sales Net Income Sales
Period 2
Operating profit margin
Net profit margin
Liquidity Ratios Current ratio Current Assets Current Liabilities Current Assets - Inventory Liabilities
Quick ratio
Operating Ratios Inventory turnover ratio Cost of Goods Sold Inventory Net Sales Net Receivables Profit Before Interest and Taxes Total Interest Charges Net Income Before Taxes Total Interest Charges Net Income Net Worth at Beginning of Period
Sales to receivables ratio
Times interest earned
Return on assets
Return on equity
Solvency Ratios Debt to worth ratio Total Liabilities Net Worth
Working capital
Current Assets - Current Liabilities
ULATOR
Difference
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0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
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0.00%