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Financial Ratios (Profitability Ratios (\(\text{net profit margin} =…
Financial Ratios
Profitability Ratios
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\(\text{operating profit margin} = \frac{\text{operating income}}{\text{revenue}} \text{ or } \frac{\text{EBIT}}{\text{revenue}}\)
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\(\text{return on assets (ROA)} = \frac{\text{net income + interest expense (1 - tax rate)}}{\text{average total assets}} \)
\(\text{operating return on assets} = \frac{\text{operating income}}{\text{average total assets}} \text{ or } \frac{\text{EBIT}}{\text{average total assets}}\)
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\(\text{return on common equity} = \frac{\text{net income - preferred dividends}}{\text{average common equity}} \)
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Solvency Ratios
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\(\text{debt-to-capital} = \frac{\text{total debt}}{\text{total debt + total shareholders' equity}} \)
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\(\text{fixed charge coverage} = \frac{\text{EBIT + lease payments}}{\text{interest payments + lease payments}} \)
Liquidity Ratios
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\(\text{quick ratio} = \frac{\text{cash + marketable securities + receivables}}{\text{current liabilities}} \)
\(\text{defensive interval} = \frac{\text{cash + marketable securities + receivables}}{\text{average daily expenditures}} \)
\(\text{cash conversion cycle} = \small\text{(days sales oustanding) + (days of inventory on hand) - (number of days of payables)} \)
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