Financial ratio analysis is performed by comparing two items in the financial statements. The resulting ratio can be interpreted in a way that is more insightful than looking at the items separately.
This page summarizes all of the most commonly used ratios and metrics in financial analysis.
Financial ratios and metrics can be classified into those that measure:
Here is a list of various financial ratios. Take note that many of the ratios are often expressed in percentage - just multiply them by 100%. Each ratio is also briefly described.
Evaluates how much gross profit is generated from sales. Gross profit is equal to net sales (sales minus sales returns, discounts, and allowances) minus cost of sales.
Also known as "net profit margin" or "net profit rate", it measures the percentage of income derived from dollar sales. Generally, the higher the ROS the better.
In financial analysis, it is the measure of the return on investment. ROA is used in evaluating management's efficiency in using assets to generate income.
Measures the percentage of income derived for every dollar of owners' equity.
Evaluates the ability of a company to pay short-term obligations using current assets (cash, marketable securities, current receivables, inventory, and prepayments).
Also known as "quick ratio", it measures the ability of a company to pay short-term obligations using the more liquid types of current assets or "quick assets" (cash, marketable securities, and current receivables).
Measures the ability of a company to pay its current liabilities using cash and marketable securities. Marketable securities are short-term debt instruments that are as good as cash.
Determines if a company can meet its current obligations with its current assets; and how much excess or deficiency there is.
Measures the efficiency of extending credit and collecting the same. It indicates the average number of times in a year a company collects its open accounts. A high ratio implies efficient credit and collection process.
Also known as "receivable turnover in days", "collection period". It measures the average number of days it takes a company to collect a receivable. The shorter the DSO, the better. Take note that some use 365 days instead of 360.
Represents the number of times inventory is sold and replaced. Take note that some authors use Sales in lieu of Cost of Sales in the above formula. A high ratio indicates that the company is efficient in managing its inventories.
Also known as "inventory turnover in days". It represents the number of days inventory sits in the warehouse. In other words, it measures the number of days from purchase of inventory to the sale of the same. Like DSO, the shorter the DIO the better.
Represents the number of times a company pays its accounts payable during a period. A low ratio is favored because it is better to delay payments as much as possible so that the money can be used for more productive purposes.
Also known as "accounts payable turnover in days", "payment period". It measures the average number of days spent before paying obligations to suppliers. Unlike DSO and DIO, the longer the DPO the better (as explained above).
Measures the number of days a company makes 1 complete operating cycle, i.e. purchase merchandise, sell them, and collect the amount due. A shorter operating cycle means that the company generates sales and collects cash faster.
CCC measures how fast a company converts cash into more cash. It represents the number of days a company pays for purchases, sells them, and collects the amount due. Generally, like operating cycle, the shorter the CCC the better.
Measures overall efficiency of a company in generating sales using its assets. The formula is similar to ROA, except that net sales is used instead of net income.
Measures the portion of company assets that is financed by debt (obligations to third parties). Debt ratio can also be computed using the formula: 1 minus Equity Ratio.
Determines the portion of total assets provided by equity (i.e. owners' contributions and the company's accumulated profits). Equity ratio can also be computed using the formula: 1 minus Debt Ratio.
The reciprocal of equity ratio is known as equity multiplier, which is equal to total assets divided by total equity.
Evaluates the capital structure of a company. A D/E ratio of more than 1 implies that the company is a leveraged firm; less than 1 implies that it is a conservative one.
Measures the number of times interest expense is converted to income, and if the company can pay its interest expense using the profits generated. EBIT is earnings before interest and taxes.
EPS shows the rate of earnings per share of common stock. Preferred dividends is deducted from net income to get the earnings available to common stockholders.
Used to evaluate if a stock is over- or under-priced. A relatively low P/E ratio could indicate that the company is under-priced. Conversely, investors expect high growth rate from companies with high P/E ratio.
Determines the portion of net income that is distributed to owners. Not all income is distributed since a significant portion is retained for the next year's operations.
Measures the percentage of return through dividends when compared to the price paid for the stock. A high yield is attractive to investors who are after dividends rather than long-term capital appreciation.
Indicates the value of stock based on historical cost. The value of common shareholders' equity in the books of the company is divided by the average common shares outstanding.
When computing for a ratio that involves an income statement item and a balance sheet item, we usually use the average for the balance sheet item. This is because the income statement item pertains to a whole period's activity. The balance sheet item should reflect the whole period as well; that's why we average the beginning and ending balances.
There are other financial ratios in addition those listed above. The ones listed here are the most common ratios used in evaluating a business. In interpreting the ratios, it is better to have a basis for comparison, such as past performance and industry standards.