Types of Financial Ratios:
A) Leverage Ratios – show how heavily a firm is in debt and measures its ability to meet financial obligations
B) Liquidity Ratios – measure how easily a firm can convert its assets into cash
C) Efficiency Ratios – measure how productively the firm is using its assets
D) Profitability Ratios – measure a firm’s return on its investments, giving an overall indication of its performance
Most Common Financial Ratios:
Leverage Ratios
- Long-Term Debt Ratio = long-term debt / long-term debt + equity
- Debt-Equity Ratio = long-term debt / equity
- Total Debt Ratio = total liabilities / total assets
- Times Interest Earned = EBIT / interest payments
- Cash Coverage Ratio = EBIT + depreciation / interest payments
- Fixed-charge Coverage Ratio = EBIT + depreciation / interest payments + (debt repayment)/(1 – tax rate)
Liquidity Ratios
- Net Working Capital to assets = net working capital / total assets
- Current Ratio = current assets / current liabilities
- Quick Ratio = cash + marketable securities + receivables / current liabilities
- Interval Measure = cash + marketable securities + receivables / average daily expenditures from operations
- Cash Ratio = cash + marketable securities / current liabilities
Efficiency Ratios
- Total Asset Turnover = sales / total assets
- Average Collection Period = receivables / average daily sales
- Inventory Turnover = cost of goods sold / inventory
- Days’ Sales in inventories = inventory / cost of goods sold/365
- Average Payment Period = payables / average daily expenses
Profitability Ratios
- Net Profit Margin = net income / sales
- Return on Assets = net income / assets
- Operating Profit Margin = net income + interest / sales
- Operating Return on Assets = net income + interest / total assets
- Return on Invested Capital = net income + interest / debt + preferred equity + common equity
- Return on Equity = net income / equity
- Payout Ratio = dividends / earnings
- Plowback Ratio = 1 – payout ratio
- Growth in Equity from Plowback = plowback ratio x ROE
