Activity Ratios (Efficiency Ratios)
Name
Equation
Description
Asset Turnover
Net Sales / Total Assets
Shows relationship between
revenue & assets.
Average
Collection
Period
Accounts Receivable / (Annual Credit The time it takes for receivables
Sales / 365)
to be paid.
Inventory Conversion Period +
Cash Conversion
Receivables Conversion Period Cycle
Payables Conversion Period
Length of time for investment to
increase sales.
Inventory
Conversion
Period
365 / Inventory Turnover Ratio
Measures time between
purchasing inventory and selling
it.
Inventory
Conversion
Ratio
(Sales x 0.5) / Cost of Goods Sold
Shows how much borrowing is
available after inventory
becomes a receivable.
Inventory
Turnover
Sales / Average Inventory
How many times inventory is
sold to customers and replaced
by the company.
Payables
Conversion
Period
(Accounts Payable / Purchases) x 365
Time it takes to pay accounts
payable.
Receivables
Conversion
Period,
DSO Ratio
(Receivables / Net Sales) x 365
Time it takes to collect accounts
receivable.
Receivables
Turnover Ratio
Net Credit Sales / Average Net
Receivables
Measures how effectively a
company uses its assets.
Basic Equations
Name
Equation
Description
Assets
Liabilites + Equity
Anything of value owned
by a company.
EBIT,
Earnings
Revenue - Operating Expenses
Before Interest
and Taxes
Measures profit.
Equity
Assets - Liabilites
Measures a company's
assets, after liabilities are
paid.
Gross Profit
Revenue - Cost of Goods Sold
Measures profit after cost
of goods sold are paid.
Liabilities
Assets - Equity
A financial obligation;
money to be paid.
Net Profit,
Net Income,
Income
Gross Profit - Operating Expenses - Taxes Interest
Measure of profit after all
associated costs are paid.
Operating
Profit
Gross Profit - Operating Expenses
Profit earned from a
company's main activities;
does not include
investments.
Sales,
Revenue,
Sales
Revenue,
Net Sales
Gross Sales - Sales of Returns and
Allowances
Measures sales, before
costs and taxes are
accounted for.
Debt Ratios
Name
Equation
Description
Debt to Equity Ratio
Total Liabilities / Shareholders Equity
How much
equity vs debt is
being used to
pay for assets.
Debt Ratio
Total Liabilities / Total Assets
Debt compared
to assets.
Debt Service
Coverage Ratio
Net Operating Income / Total Debt Service
Cash available to
pay off debt.
Long-Term Debt to
Equity Ratio
Long-Term Liabilities / Equity
Equity vs longterm debt.
Depreciation
Name
Book Value
Declining
Balance,
Reducing
Balance
Straight-Line
Method
Equation
Description
Acquisition Cost - Depreciation
The value of
an asset on a
company's
balance
sheet.
Depreciation Rate x Book Value at Beginning of Year
Commonly
used method
of
accelerated
depreciation.
(Cost of Fixed Asset - Residual Value) / Useful Life of
Asset (in years)
Easiest and
most
common
method of
depreciation.
Units of
Production
[(Cost of Asset - Redidual Value) / Estimated Total
Production] x Actual Production
Depreciation
measured by
how many
units are
produced.
Liquidity Ratios
Name
Equation
Description
Acid Test Ratio,
Quick Ratio
(Current Assets - Inventories) / Current
Liabilities
A quick way
to measure a
company's
liquidity.
Cash Ratio
(Cash + Marketable Securities) / Current
Liabilities
Cash
compared to
liabilities.
Current Assets / Current Liabilities
Measures
ability to pay
short-term
liabilities.
Operating Cash Flow / Total Debts
Ability to pay
liabilities with
operating cash
flow.
Current Ratio,
Working Capital Ratio
Operating Cash Flow
Ratio
Market Ratios
Name
Dividend Cover
Dividend Yield
Equation
Description
Earnings per Share / Dividends per Share
Earnings
compared to
dividends.
Annual Dividends per Share / Price per Share
Dividends
compared to
market
capitalization.
Dividends Per Share Dividends Paid / Number of Shares
Amount of
dividends for
each share.
Earnings Per
Share,
EPS
Net Earnings / Number of Shares
Amount of
earnings for
each share.
Payout Ratio
Dividends / Earnings
Dividends per
earnings.
Price per Earnings / Annual EPS Growth
Price of a
stock
compared to
company
growth.
Price per Share / Revenue per Share
Comparing a
stock to past
performace
and market.
PEG Ratio
Price / Sales Ratio
Profibility Ratios
Equation
Descriptio
n
Non-Interest Expense / Revenue
Measures
efficiency
of asset &
liability
usage.
Gross Profit Margin,
Gross Margin
Percentage,
Gross Profit Ratio,
Gross Profit Rate
Gross Profit / Revenue
Percentage
of revenue
left after
deducting
costs.
Operating Margin,
Operating Income
Margin,
Operating Profit Margin,
Return on Sales
Operating Income / Revenue
Used to
evaluate
pricing.
Profit Margin,
Net Profit Margin,
Net Margin,
Net Profit Ratio
Net Profit / Revenue
How much
revenue is
kept in
profit.
Return on Assets
Net Income / Total Assets
Profit
compared
to assets.
Return on Capital
EBIT(1 - Tax Rate) / Invested Capital
Profit
compared
to capital.
Return on Equity
Net Income / Average Shareholder Equity
Profit
compared
to equity.
Return on Investment,
ROI
(Gain from Investment - Cost of Investment) /
Cost of Investment
Name
Efficiency Ratio
Measures
efficiency
of an
investment.
Return on Net Assets
Income
compared
Net Income / (Fixed Assets + Working Capital)
to net
assets.
Risk-Adjusted Return on
Capital
Expected Return / Economic Capital
ROI,
adjusted for
risk.
