| Ratio |
How Calculated |
What It Shows |
| 1.Gross profit margin |
Sales - Cost of goods sold / Sales |
An indication of the total margin available to
cover operating expenses and yield a profit. |
| 2.Operating profit margin (or return on sales) |
Profits before taxes and before interest /
Sales |
An indication of the firm's profitability from
current operations without regard to the interest charges accruing from the capital
structure. |
| 3.Net profit margin (or net return on sales) |
Profits after taxes/Sales |
Shows after tax profits per dollar of sales.
Subpar profit margins indicate that the firm's sales prices are relatively low or that
costs are relatively high, or both. |
| 4.Return on total assets |
Profits after taxes/ Total assets or Profits
after taxes + interest/ Total assets |
A measure of the return on total investment in
the enterprise. It is sometimes desirable to add interest to aftertax profits to form the
numerator of the ratio since total assets are financed by creditors as well as by
stockholders; hence, it is accurate to measure the productivity of assets by the returns
provided to both classes of investors. |
| 5.Return on stockholder's equity (or return on
net worth) |
Profits after taxes /Total stockholders' equity |
A measure of the rate of return on
stockholders' investment in the enterprise. |
| 6.Return on common equity |
Profits after taxes - Preferred stock
dividends/ Total stockholders' equity - Par value of preferred stock |
A measure of the rate of return on the
investment the owners of the common stock have made in the enterprise. |
| 7.Earnings per share |
Profits after taxes - Preferred stock dividends /Number of shares of
common stock outstanding |
Shows the earnings available to the owners of each share of common stock. |
| 1.Current ratio |
Current assets/Current liabilities |
Indicates the extent to which the claims of
short-term creditors are covered by assets that are expected to be converted to cash in a
period roughly corresponding to the maturity of the liabilities. |
| 2.Quick ratio (or acid-test ratio) |
Current assets - Inventory/ Current liabilities |
A measure of the firm's ability to pay off
short-term obligations without relying on the sale of its inventories. |
| 3.Inventory to net working capital |
Inventory/Current assets - Current liabilities |
A measure of the extent to which the firm's
working capital is tied up in inventory. |
| 1.Debt-to-assets ratio |
Total debt/Total assets |
Measures the extent to which borrowed funds
have been used to finance the firm's operations. |
| 2.Debt-to-equity ratio |
Total debt/Total stockholders' equity |
Provides another measure of the funds provided
by creditors versus the funds provided by owners. |
| 3.Long-term debt-to-equity ratio |
Long-term debt/Total stockholders' equity |
A widely used measure of the balance between
debt and equity in the firm's long-term capital structure. |
| 4.Times-interest-earned (or coverage) ratio |
Profits before interest and taxes/ Total
interest charges |
Measures the extent to which earnings can
decline without the firm becoming unable to meet its annual interest costs. |
| 5.Fixed-charge coverage |
Profits before taxes and interest + Lease
obligations/ Total interest charges + Lease obligations |
A more inclusive indication of the firm's
ability to meet all of its fixed-charge obligations. |
| 1.Inventory turnover |
Sales/Inventory of finished goods |
When compared to industry averages, it provides
an indication of whether a company has excessive or perhaps inadequate finished goods
inventory. |
| 2.Fixed assets turnover |
Sales/Fixed assets |
A measure of the sales productivity and
utilization of plant and equipment. |
| 3.Total assets turnover |
Sales/Total assets |
A measure of the utilization of all the firm's
assets; a ratio below the industry average indicates the company is not generating a
sufficient volume of business, given the size of its asset investment. |
| 4.Accounts receivable turnover |
Annual credit sales/Accounts receivable |
A measure of the average length of time it
takes the firm to collect the sales made on credit. |
| 5.Average collection period |
Accounts receivable/ Total sales/365 or
Accounts receivable/ Average daily sales |
Indicates the average length of time the firm
must wait after making a sale before it receives payment. |
| 1.Dividend yield on common stock |
Annual dividends per share/Current market price
per share |
A measure of the return to owners received in
the form of dividends. |
| 2.Price-earnings ratio |
Current market price per share/ After tax
earnings per share |
Faster-growing or less-risky firms tend to have
higher price-earnings ratios than slower-growing or more-risky firms. |
| 3.Dividend payout ratio |
Annual dividends per share/After tax earnings
per share |
Indicates the percentage of profits paid out as
dividends. |
| 4.Cash flow per share |
After tax profits + Depreciation/ Number of
common shares outstanding |
A measure of the discretionary funds over and
above expenses that are available for use by the firm. |
