Financial Statement Ratio Analysis

Key Things To Know

Introduction to Accounting

Key Things To Know


This website covers the most common ratios. You may need to add ratios that are in your textbook the professor wants you to know.

Average = Beginning of year amount (prior year) + end of year amount / 2

Balance Sheet Commonly Used Ratios:

Current Ratio

Current Assets
Current Liabilities

Indicates the ability of the company to pay operating expenses

Quick Ratio

Liquid Current Assets
Current Liabilities

Indicates the immediate liquidity of the company

Total Liabilities to Total Assets

Total Liabilities
Total Assets

Indicates the percentage of assets that have not been paid for (owe for)

Inventory Turnover

Cost of Goods Sold

= Inventory Turnover

and then

         365 days          
Inventory Turnover

Indicates how many days inventory is in the warehouse before it is sold.
Slow moving inventory ties up cash and indicates sales are slowing.

Accounts Receivable Turnover

Net Sales
Average Accounts Receivables

= Accounts Receivable Turnover

and then

                    365 days                
Accounts Receivable Turnover

Indicates how many days it takes to collect from customers after the goods/services
are provided. An increase in days to collect often leads to increased bad debt expense.

Debt to Equity

Total Liabilities
Average Shareholder’s Equity

Indicates how the company finances growth (borrowing or investors)

Income Statement Commonly Used Ratios:

Profit Margin

Net Income

Indicates the portion of each sales dollar that becomes profits of the company.

Net income can also be replaced to give different ratios:

Use “Operating Income” to get Operating Profit Margin

Use “Gross Profit” to get Gross Profit Margin

Return on Assets

Net Income
Average Total Assets

Indicates how efficiently the company uses the assets they invest in

Return on Equity

Net Income
Average Shareholder’s Equity

Indicates the % return on each dollar invested (left in the company) by the shareholders

Investor Commonly Monitored Ratios:

Earnings per Share

Net Income – Preferred Dividends 
Average Number of Common Shares Outstanding

Earnings per share is the earning allocated to one share of ownership.
Earnings per share is used as one factor to value a share of common stock:

    Earnings per share
x Annual Estimated Future Growth Percent 
= Fair Market Value of a Share of Common Stock

Price to Earnings

Market Price (FMV) of a Common Share
Earnings per Share

Gives how many years of earnings an investor who pays the market price of a stock pays for.

Used to determine if a share of common stock is fairly valued in relation to the company’s rate of growth.