Ratios Used in Financial Statement Analysis

Ratios Used in Financial Statement Analysis - Ratios Used...

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Unformatted text preview: Ratios Used in Financial Statement Analysis (pg. 617) Profitability Ratios Net Profit Margin = x 100 Tells how well expenses are controlled. A higher ratio means better performance. Gross Profit Percentage = x 100 Tells the percentage of profit earned on each dollar of sales, after considering the cost of products sold. A higher ratio means that greater profit is available to cover operating and other expenses. Assets Turnover Ratio = Tells how well assets are used to generate revenues. A higher ratio means greater efficiency. Fixed Asset Turnover Ratio = Tells dollars of sales generated for each dollar invested in fixed assets (long-lived tangible assets). A higher ratio implies greater efficiency. Return on Equity (ROE) = x 100 Tells the amount of income earned for each dollar of stockholders’ equity. A higher ratio means stockholders are likely to enjoy greater returns. Earnings per Share (EPS) = Tells the amount of income generated for each share of common stock owned by stockholders. A higher ratio means greater profitability. Quality of Income Ratio = Tells whether operating cash flows and net income are in sync. A ratio near 1.0 means operating cash flows and net income are in sync. Price/Earnings (P/E) Ratio = Tells how many times more than the current year’s earnings investors are willing to pay for a company’s common stock. A higher number means investors anticipate an improvement in the company’s future results. Liquidity Ratios Receivables Turnover Ratio = Tells the number of times receivables turn over during the period. A higher ratio means faster (better) turnover. Days to Collect = Tells the average number of days from sale on account to collection. A higher number means a longer (worse) time to collect. Inventory Turnover Ratio = Tells the number of times inventory turns over during the period. A higher ratio means faster turnover. Days to Sell = Tells the average number of days from purchase to sale. A higher number means a longer time to sell. Current Ratio = Tells whether assets are sufficient to pay current liabilities. A higher ratio means better ability to pay. Quick Ratio = Tells whether liquid assets are sufficient to pay current liabilities. The higher the number the better able to quickly pay. , Solvency Ratios Debt-to-Assets Ratio = Tells the percentage of assets financed by debt. A higher number means greater financing risk. Times Interest Earned Ratio = Tells whether sufficient resources are generated to cover interest costs. The higher the number the better the coverage. Capital Acquisitions Ratio = Tells whether operating cash flows are sufficient to pay for PPE purchases. A higher ratio means less need for external financing (<1.0 >1 means no need for outside financing). ...
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This note was uploaded on 02/03/2011 for the course MGA 201 taught by Professor Anderson during the Fall '08 term at SUNY Buffalo.

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