financial accounting Ratios cheat sheet PDF

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Summary

includes all formulas for all Ratios for mid term from chapters 1 to chapter 6. does not include chapter 5....

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The Current Ratio ANALYTICAL QUESTION → Does the company currently have the resources to pay its short-term debt? RATIO AND COMPARISONS → Analysts use the current ratio as an indicator of the amount of current assets available to satisfy current liabilities. It is computed as follows:

Current Ratio = Current Assets / Current Liabilities

Debt Equity Ratio • The Debt to Equity Ratio is a leverage ratio that calculates the value of total debt and financial liabilities against the total shareholder's equity. ratio isn’t usually expressed as a percentage if your debt-to-equity ratio is too high, it’s a signal that your company may be in financial distress and unable to pay your debtors. But if it’s too low, it’s a sign that your company is over-relying on equity to finance your business, which can be costly and inefficient. A very low debt-to-equity ratio puts a company at risk for a leveraged buyout

Technology-based businesses and those that do a lot of R&D tend to have a ratio of 2 or below. Large manufacturing and stable publicly traded companies have ratios between 2 and 5. “Any higher than 5 or 6 and investors start to get nervous,” he explains. In banking and many financial-based businesses, it’s not uncommon to see a ratio of 10 or even 20, but that’s unique to those industries.

Annual Sales Growth • To start, subtract the net sales of the prior period from that of the current period. Then, divide the result by the net sales of the prior period. Multiply the result by 100 to get the percent sales growth The sales growth rate measures the rate at which a business is able to increase revenue from sales during a fixed period of time.

If this rate decreases compared to prior periods, that can be an indication that the sales team needs to take a different approach to drive revenue growth. Conversely, a high sales growth rate is often seen as a good sign for company stakeholders.

Annual Profit Growth • To calculate revenue growth as a percentage, you subtract the previous period's revenue from the current period's revenue, and then divide that number by the previous period's revenue. So, if you earned $1 million in revenue last year and $2 million this year, then your growth is 100 percent.

Earnings per Share Corporations are required to disclose earnings per share on the statement of earnings or in the notes to the financial statements. This ratio is widely used in evaluating the operating performance and profitability of a company. net earnings Simple earnings per share = ____________________ average number of shares outstanding during the period.

The calculation of the ratio is actually more complex and beyond the scope of this course.

RET ETU URN ON AS ASSSETS (R (RO OA)  ANALYTICAL QUESTION → How well has management used the total invested capital provided by debt holders and shareholders during the period? Return on Assets (ROA) Ratio

Net Earnings* + Interest Expense (net of tax) Average Total Assets

*In complex calculations, interest expense (net of tax) and minority interest are added back to net earnings.

 ROA measures how much the firm earned from the use of its assets.  It is the broadest measure of profitability and management effectiveness, independent of financing strategy.  ROA allows investors to compare management’s investment performance against alternative investment options.  Firms with higher ROA are doing a better job of selecting new investments, all other things being equal.

TOTAL ASSET TURNOVER RATIO ANALYTICAL QUESTION → How effective is management at generating sales from assets (resources)? The total asset turnover ratio is useful in answering this question. It is computed as follows: Total Asset Turnover Ratio

=

Sales (or Operating) Revenues Average Total Assets*

*Average total assets = (Beginning total assets + Ending total assets) ÷ 2.  The total asset turnover ratio measures the sales generated per dollar of assets.  A high total asset turnover ratio signifies efficient management of assets; a low total asset turnover ratio signifies less-efficient management.  Stronger operating performance improves the total asset turnover ratio.  Creditors and security analysts use this ratio to assess a company’s effectiveness at controlling current and non-current assets

Earnings Per Share (EPS) • The actual calculation for EPS is quite complex and appropriate for intermediate accounting courses; however, in this text we simplify the earnings per share calculation to be:

Net Profit Margin Ratio  The net profit margin ratio compares net earnings to the revenues generated during the period. ANALYTICAL QUESTION → How effective is management at controlling revenues and expenses to generate more earnings?

Net Earnings Net Sales (or Operating revenues)*

Net Profit Margin Ratio

• *Net sales is sales revenue less any returns from customers, and other reductions. For companies in the service industry, total operating revenues equals net sales.

=

• The net profit ratio margin measures how much profit is earned as a percentage of revenues generated during the period. • A rising net profit margin ratio signals more efficient management of sales and expenses.

• Financial analysts expect well-run businesses to maintain or improve their net profit margin ratio over time.

Return on Equity (ROE) The return on equity relates net earnings to shareholders’ investment in the business. ANALYTICAL QUESTION → How well has management used shareholder investment to generate net earnings during the period? Net Earnings

Return on =Average Shareholders’ Equity* Equity *Average shareholders’

equity = (Beginning shareholders’ equity + ROE measures how much the firm earned as a percentage of Ending shareholders’ equity) ÷ 2

shareholders’ investment. In the long run, firms with higher ROE are expected to have higher share prices than firms with lower ROE, all other things being equal. Managers, analysts, and creditors use this ratio to assess the effectiveness of the company’s overall business strategy (its operating, investing, and financing strategies).

Gross Profit Percentage ANALYTICAL QUESTION → How effective is management at selling goods and services for more than the costs to purchase or produce them?

Gross Profit Percentage

=

Gross Profit Net Sales

Interpretation in General → The gross profit percentage measures how much gross profit is generated from every sales dollar. It reflects the ability to charge premium prices and produce goods and services at low cost. All other things being equal, a higher gross profit results in higher net earnings.

Receivables Turnover Ratio ANALYTICAL QUESTION → How effective are credit granting and collection activities?

Receivables Turnover =

Net Credit Sales Average Net Accounts Receivable

Interpretations in General → The receivables turnover ratio reflects how many times average accounts receivable are recorded and collected during the period.

The higher the ratio, the faster the collection of receivables.

Average Collections Period The average collection period or average days to collect receivables answers the question: how many days would be needed, on average, to turn the receivables over once? It is calculated by dividing the receivables turnover ratio into 365 days:

Average Collection Period

=

365 Receivables Turnover...