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| KEY FINANCIAL STATEMENT RATIOS | rev. 3-19-2010 | rev. Feb 2010 | ||||||||||||||
| 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 per year | If the turnover ratio is decreasing | |||||||||||||||
| Accts Receivable | Sales (credit only) | 6.0 times | receivables were generated | or avg number of days to collect is | ||||||||||||
| Turnover | Accounts receivable | and then paid (“turned over”) | increasing or is substantially greater | |||||||||||||
| than credit terms (e.g., “30 days, net”), | ||||||||||||||||
| Avg Number of | 365 (days in year) | 60.8 days | Number of days customers are | then credit and collection policies may | ||||||||||||
| Days to Collect | A/R turnover ratio | taking to pay | need to be strengthened. | |||||||||||||
| Number of times merchandise | ||||||||||||||||
| Inventory | Cost of Goods Sold* | 4.0 times | items are sold and restocked | |||||||||||||
| Turnover | Inventory* | (“turned over”) per year. | If the turnover ratio is decreasing | |||||||||||||
| or number of days in Inventory is | ||||||||||||||||
| * Some publications use “Sales” as the numerator, and/or average inventory as denominator | increasing , inventory may becoming | |||||||||||||||
| outdated and possibly overstated | ||||||||||||||||
| Avg Number of | 365 (days in year) | 91.3 days | Number of days inventory remains | |||||||||||||
| Days in Inventory | Inv. turnover ratio | unsold | ||||||||||||||
| 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 operating | Low ratio = low margin of safety, | ||||||||||||
| Earned | Interest expense | 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) | ||||||||||||||||
| Net Profit | Net Income | 5.1% | Net income as a percentage of sales. | Low percentage = low safety | ||||||||||||
| Margin (%) | 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 Operating 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 (%) | Total Equity ** | investment. (However, “dividend yield” | debt, i.e., high interest expense. | |||||||||||||
| for stockholders is generally much less.) | ||||||||||||||||
| * Some publications use Net income (after tax) instead of Operating income (i.e., earnings before interest and income tax, or EBIT) | ||||||||||||||||
| ** If preferred stock exists, subtract Preferred Dividends from Net Income, and 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 on | perceive good growth potential—but | |||||||||||||
| their perception of future share price. | they could be (and often are) wrong. | |||||||||||||||
| * If EPS is negative, ratio is “not applicable” | ||||||||||||||||
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