SUMMARY OF FINANCIAL ACCOUNTING RATIO

 

PROFITABILITY RATIO:

Financial Ratio	Formula	Measurements
Return on Total Assets	Operating profit before income tax + interest expense/ Average total assets	Measures rate of return earned through operating total assets provided by both creditors and owners
Return on ordinary shareholders’ equity	Operating profit & extraordinary items after income tax minus Preference dividends / Average ordinary shareholders’ equity	Measures rate of return earned on assets provided by owners
Gross Profit Margin	Gross Profit / Net Sales	Profitability of trading and mark-up
Profit Margin	Operating profit after income tax / Net Sales Revenue	Measures net profitability of each dollar of sales

MARKET BASED FINANCIAL RATIO:

Financial Ratio	Formula	Measurements
Earnings per share	Operating profits after income tax less Preference dividends / Weighted average number of ordinary shares issued	Measures profit earned on each ordinary share
Price-earnings ratio	Market price per ordinary share / Earnings per ordinary share	Measures the amount investors are paying for a dollar of earnings
Earning Yield	Earnings per ordinary share / Market price per ordinary share	Measures the return to an investor purchasing shares at the current market price.
Dividend Yield	Annual dividend per ordinary share / Market price per ordinary share	Measures the rate of return to shareholders based on current market price.
Dividend Payout	Total dividend per ordinary share / Market price per ordinary share	Measures the percentage of profits paid out to ordinary shareholders
Net Asset Backing (NTA)	Ordinary shareholders’ equity / No of ordinary shares	Measure the assets backing per share

LIQUIDITY RATIO:

Financial Ratio	Formula	Measurements
Current Ratio	Current Assets / Current liabilities	A measure of short-term liquidity. Indicates the ability of entity to meet its short-term debts from its current assets
Quick Ratio	Current Assets less inventory / Current liabilities	A more rigorous measure of short-term liquidity. Indicates the ability of the entity to meet unexpected demands from liquid current asses

ASSET MANAGEMENT/UTILISATION/ACTIVITY RATIOS:

Financial Ratio	Formula	Measurements
Receivables turnover	Net sales revenue / Average receivables balance	Measures the effectiveness of collections; used to evaluate whether receivables balance is excessive
Average collection period	Average receivables balance x 365 / Net sales revenue	Measures the average number of days taken by an entity to collect its receivables
Inventory turnover	Cost of goods sold / Average inventory balance	Indicates the liquidity of inventory. Measures the number of times inventory was sold on the average during the period
Total Asset turnover ratio	Net sales revenue / Average total assets	Measures the effectiveness of an entity in using its assets during the period.
Turnover of Fixed Assets	Net Sales / Fixed Assets	Measure the efficiency of the usage of fixed assets in generating sales

GEARING/FINANCIAL STABILITY RATIO:

Financial Ratio	Formula	Measurements
Debt ratio	Total Liabilities / Total assets	Measures percentage of assets provided by creditors and extent of using gearing
Equity ratio or Proprietary ratio	Total shareholders’ equity / Total assets	Measures percentage of assets provided by shareholders and the extent of using gearing
Capitalization ratio	Total assets / Total shareholders’ equity	The reciprocal of the equity ratio and thus measures the same thing
Times interest earned	Operating profit before income tax + Interest expense / Interest expense + Interest capitalized	Measures the ability of the entity to meet its interest payments out of current profits.

CASH SUFFICIENCY RATIO:

Financial Ratio	Formula	Measurements
Cash flow adequacy	Cash from operations / Long-term debt paid + Assets acquired + Dividends paid	Measures the entity’s ability to cover its main cash requirements
Long-term debt repayment	Long-term debt repayments / Cash from operations	Measures the entity’s ability to cover its long-term debt out of cash from operations
Dividend payment	Dividends paid / Cash from operations	Measures the entity’s ability to cover its dividend payment
Reinvestment	Non-current asset payments / Cash from operations	Measures the entity’s ability to pay for its non-current assets out of cash from operations
Debt coverage	Total long-term debt / Cash from operations	Measures the payback period for coverage of long-term debt.

CASH FLOW EFFICIENCY RATIO:

Financial Ratio	Formula	Measurements
Cash flow to sales	Cash from operations / Net sales revenue	Measures ability to convert sales revenue into cash flows
Operation index	Cash from operations / Operating profit after income tax	An index measuring the relationship between profit from operations and operating cash flows
Cash flow return on assets	Cash from operation + Tax paid + Interest paid / Average total assets	Measures the operating cash flow return on assets before interest and tax

FORECAST BANKRUPTCY RATIO:

Refer to Altman Z’s Financial Ratio

Each financial ratio is linked to the respective topic in this blog to provide more details for the readers.