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FSA Note: Summary of Financial Ratio Calculations
This note contains a summary of the more common financial statement ratios. A few points should be noted:
Calculations vary in practice; consistency and the intuition underlying the calculated ratio are important. This list is not exhaustive.
A firm’s fiscal year end often corresponds to the point in time at which business activity is at its lowest. Hence, ratios calculated usinginternal data at different points in the year may differ significantly from those based on published financial statements.
Pictorial Summary of Common Financial Ratios
Liquidity
Debt Management
Asset
Management
Profitability
Return toInvestors
Short RunSolvency
Liquidity of
CurrentAssets
Amount of
Debt
Coverage of
Debt
OperatingEfficiency
Margins
Returns
Earnings per
Share
Current ratio
Collection
period
Debt to assets
Times interest
earned
Receivable
turnover
Gross profit
margin
ROIC
ROE
Quick ratio
Days
inventory
held
Debt toequity
CFO tointerest
Inventoryturnover
Operating
profit margin
Cash ROA
ROCE
Cash ratio
Days
payables
outstanding
Long termdebt to total
capital
CFO to debt
Fixed asset
turnover
Net profit
margin
ROA
Dividend
yield
CFO ratio
Net trade
cycle
Cash flowadequacy
Asset
turnover
ROE
Dividend
payout
Defensive
interval
Return on
assets
P/E
(Not all ratios are represented in this picture; some ratios pertain to more than one category.) FSA formulas
Liquidity Ratios Numerator Denominator Interpretation and benchmark Current ratio = Current assets Current liabilities Short-term debt paying ability. Current assets less current liabilities =“working capital,” the relatively liquid portion of an enterprise that servesas a safeguard for meeting unexpected obligations arising within theordinary operating cycle of the business. Benchmark: PG, HA, ROT (>2) Quick (acid-test) ratio = Cash + marketable securities + net receivables Current liabilities Immediate short-term liquidity Benchmark: PG, HA, ROT (>1) Cash ratio = Cash + marketable securities Current liabilities More conservative than quick ratio as it excludes net receivables (all ofwhich may not be collected) Benchmark: PG, HA, ROT (>40-50%) CFO ratio = CFO Average current liabilities Ability to repay current liabilities from operations Benchmark: PG, HA, ROT (>40-50%) Defensive interval = (Cash burn rate) 365 X Quick ratio numerator Projected expenditures (= COGS + Otheroperating expenses except depreciation) Conservative view of firm’s liquidity. Compares currently available quicksources of cash with estimated outflows needed to operate. Benchmark: PG, HA Working capital = Current assets – Current liabilities Note: you may have used a different definition from corporate finance.Please use this definition for FSA. Abbreviations for benchmarks: ROT: rule of thumb. EB: economic benchmark. PG: peer group average. HA: firm’s historical average. Note: The rule of thumb numbers vary significantly depending on whose “thumbs” we are talking about. Provided here are the often-seen numbers. Industry peer and firms’ historical average are always useful benchmarks. FSA formulas
Profitability Ratios Numerator Denominator Interpretation and Benchmark Return on equity (ROE) = Net income Average total shareholders’ equity Profitability of all equity investors’ investment Benchmark: EB (Cost of equity capital), PG, HA Return on assets (ROA) = Net Income + Interest expense * (1-tax rate) Average total assets Overall profitability of assets. Sometimes called return on investment (ROI). Benchmark: EB (WACC), PG, HA Return on invested capital (ROIC) = ( See Course Note for details
NOPAT = EBIT * (1- tax rate) Average invested capital Overall profitability of invested capital. Sometimes called return on capitalemployed (ROCE) or return on net operating assets (RNOA). Benchmark: EB (WACC), PG, HA Gross profit margin on sales = Net sales – COGS = Gross margin Net sales Captures the relation between sales generated and manufacturing (or merchandising)costs Benchmark: PG, HA Operating Margin = EBIT Net sales Measures profitability independently of an enterprise’s financing and tax positions Benchmark: PG, HA Net profit margin on sales = Net income Net Sales Net income generated by each sales dollar Benchmark: PG, HA Cash return on assets = CFO Average total assets Measures return on assets on “cash” basis. Benchmark: PG, HA Earnings per share (EPS) = Net income less preferred dividends Weighted common shares outstanding Net income earned per common share Benchmark: PG, HA Price earnings ratio (P-E) = Market price of stock Earnings per share Ratio of market price to earnings per share Benchmark: PG, HA Market to book ratio = Market value of equity Book value of equity Ratio of the market’s valuation of the enterprise to the book value of the enterpriseon its financial statements. Benchmark: PG, HA Dividend Payout = Cash dividends paid on common equity Net income Percentage of earnings distributed as cash dividends. Note: Some firms/analystscalculate this using cash dividends declared in the numerator instead. Benchmark: PG, HA Dividend Yield = Cash dividends paid per share of common equity Price per share Percentage of share price distributed as cash dividends Benchmark: PG, HA FSA formulas
Solvency
Ratios Numerator Denominator Interpretation and Benchmark Debt to total assets = Total debt Total assets Percentage of total assets provided by creditors. Total debt is a subset of totalliabilities. Typically, you sum total long term debt and the current portion of longterm debt in the numerator. Other additions might be made: notes payable,capital leases, and operating leases if capitalized. Benchmark: EB (optimal capital structure), PG, HA Debt to equity = Total debt Total shareholders’ equity Percentage of total assets provided by owners. Benchmark: EB (optimal capital structure), PG, HA Financial leverage = Total (average) assets Total (average) shareholders’ equity Degree to which enterprise uses owners’ capital to finance assets. We’ll calculatethis ratio using the averages of the balance sheet accounts to facilitate our ratiodecomposition. Benchmark: EB (optimal capital structure), PG, HA Times interest earned (TIE) = EBIT Interest expense Ability to meet interest payments as they mature. EBIT is sometimes calledOperating Income. Benchmark: PG, HA, ROT (minimal 2-4) CFO to interest = CFO + interest and taxes paid in cash Interest expense Ability to meet interest payments from operating cash flow. Some analystscalculate the numerator using CFO + interest expense + tax expense. Thiscalculation is less internally consistent as what we are striving for in thenumerator is a cash flow number, not a mix of cash flow and accruals. Benchmark: PG, HA, ROT (>=2-4) CFO to debt = CFO + interest and taxes paid in cash Average total liabilities Ability to repay total liabilities in a given year from operations. See caveat aboveregarding numerator. Benchmark: PG, HA, ROT (?) Cash flow adequacy = CFO CAPEX + debt and dividends payments Measures how many times capital expenditures, debt repayments, cash dividendscovered by CFO. Benchmark: PG, HA, ROT (1) Book value per share = Common shareholders’ equity Outstanding shares Amount each share would receive if company were liquidated at the amountsreported on the balance sheet Benchmark: none CFO to Operating earnings = CFO Operating earnings Operating cash flow + accruals = operating earnings. This ratio gives anindication of how much CFO differs from operating earnings due to accountingaccruals. Benchmark: PG, HA, ROT (>1). FSA formulas
