Financial Accounting Ratios

Front 1

Gross Margin = (Sales-CGS)/Sales

Back 1

Shows the relation between sales price and cost of product sold. Closely watched for any company with significant levels of inventory, such as retailers. It is one of the three main margin numbers.

Front 2

Cost Ratio = CGS/Sales

Back 2

Compliment to gross margin, also showing the relation between sales price and cost of product sold.

Front 3

EBIT = Sales-CGS-SG&A-R&D-Depreciation

Back 3

Also referred to as Operating Income, it is the core income that the firm produces in its main line of business.

Front 4

EBIT Margin = EBIT/Sales

Back 4

Also referred to as Operating Margin, it is one of the three main margin numbers.

Front 5

Profit Margin = NI/Sales

Back 5

This is common sized net income. It is sometimes called "Return on Sales." Shows how many pennies of each dollar of sales made it all the way to net income. It is one of the three main margin numbers.

Front 6

Asset Turnover (End) = Sales/Ending Total Assets

Back 6

This shows how many dollars of sales are generated for each dollar of assets.

Front 7

Asset Turnover (Ave) = Sales/Average Total Assets

Back 7

Shows how many dollars of sales are generated for each dollar of assets, but uses the average of total assets from different years, especially in the case that assets change significantly from year to year.

Front 8

Accounts Receivable Turnover = Sales/Accounts Receivable

Back 8

This measures how many times in the reporting cycle the firm collected its receivables.

Front 9

Days Sales Outstanding = 365/Accounts Receivable Turnover

Back 9

Measures how many days, on average, it takes for the firm to collect its receivables.

Front 10

Inventory Turnover = CGS/Inventory

Back 10

This measures the number of times during the year that the firm sold its inventory.

Front 11

Days Sales in Inventory = 365/Inventory Turnover

Back 11

Measures the number of days, on average, it takes for the firm to sell its inventory.

Front 12

Purchases = Ending Inventory+CGS-Beginning Inventory

Back 12

Purchases can be found by looking at the journey entry, but can also be calculated using this equation.

Front 13

Accounts Payable Turnover = Purchases/Accounts Payable

Back 13

Measures the number of times per year the firm pays its vendors (suppliers of inventory).

Front 14

Days Payable Outstanding = 365/Accounts Payable Turnover

Back 14

The number of days, on average, it takes for a firm to pay its vendors.

Front 15

Leverage = Assets/Equity

Back 15

This shows how the firm is financed (more debt financed or more equity financed?). Measures how much the firm has in assets for each dollar of equity.

Front 16

Return on Equity = ROE = NI/Equity

Back 16

Relates the earnings of the firm to owner's equity, and is a very popular performance measure.

Front 17

Return on Equity = ROE = Profit Margin * Asset Turnover * Leverage = (NI/Sales)*(Sales/Assets)*(Assets/Equity)

Back 17

DuPont Meathod of breaking down ROE. It is useful to "drill down" into how a firm achieved a certain ROE and how it can improve.

Front 18

Current Ratio = Current Assets/Current Liabilities

Back 18

This is a liquidity measure. Shows how easily the firm will be able to cover its short term obligations.

Front 19

Quick Ratio = Liquid Current Assets (cash, receivables, etc)/Current Liabilities

Back 19

Focuses on the most liquid assets' availability to cover the current liabilities.

Front 20

Debt to Capital = Debt/(Debt+Capital)

Back 20

This shows how the firm is financed. It is another ratio that measure leverage.

Front 21

Interest Coverage = EBIT/Interest Expense

Back 21

This shows how well the firm can cover its interest charges from core, operating income. Bondholders and bankers want this ratio to be relatively high; the higher the ratio, the great the assurance that they will be paid their interest.

Front 22

Dividend Payout = Dividends/NI

Back 22

A way for a firm to state their dividend policy in terms of a percentage of earnings that they wish to payout on an ongoing basis.

Front 23

Effective Tax Rate = Tax Expense/Pretax Income

Back 23

Is often the same, but sometimes differs from the statutory tax rate.

Front 24

NOPAT = Net Operating Profit After Tax = EBIT*(1-Effective Tax Rate)

Back 24

This is EBIT, or operating income, after-tax.

Front 25

ROIC = Return on Invested Capital = NOPAT/(Ending book values of all interest bearing debt + Owners' Equity)

Back 25

Measures the accounting returns to all suppliers of capital, both debt and equity. It is a parallel measure to ROE, however ROE measures the accounting returns attributable only to stockholders.

Front 26

Cost of Debt Financing = Effective Interest Rate After Tax = Interest Expense * (1-Effective Tax Rate)/Interest Bearing Debt

Back 26

Measures debt financing, which is in essence subsidized by the government because corporations receive a tax shield from interest.

Front 27

Debt to Equity = Interest Bearing Debt/Owners' Equity

Back 27

This is a measure of the financial leverage or the degree to which the firm using fixed rate debt financing.

Front 28

Market Capitalization = Price per Share * Number of Shares Outstanding

Back 28

Shows the value of the equity at any given point in time.

Front 29

Market to Book Ration = Market Capitalization/Book Value of Equity

Back 29

This ratio of market value (which represents a sort of "average" value of the stock across all stockholders) to book value highlights the discrepancy between firm value as determined by market participants and that according to accounting rules.

Front 30

Dividends per Share = Dividends Paid/Number of Shares Outstanding

Back 30

This figure, measuring the amount of dividends paid per share, is an often cited descriptor of a firm. If lower than last year, it sends strong negative signals to the market. If much higher than last year, the firm is essentially locking themselves into that higher dividend for an extended period of time.

Front 31

Total Return to Shareholders = (Current Price per Share - Previous Price per Share + Dividend per Share)/Previous Price per Share

Back 31

This shows how the firm as performed in the recent past for its shareholders in terms of increasing the value of their investment.

Front 32

Dividend Yield = Dividend per Share/Price per Share

Back 32

This measure the amount of cash dividend return on a current investment in the stock.

Front 33

Cost of Equity = Risk Free Rate of Interest + (Beta*Risk Premium)

Back 33

A guess based on risk. A beta of 3 is not unusual for some high tech firms. A beta of 0.4 is not unusual for a utility firm.