Financial Statement Ratio Analysis
Key Things To Know
Introduction to Accounting
Financial Statement Ratio Analysis
Key Things To Know
Important:
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
= 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
Sales
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.