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FINANCIAL RATIOS - Coggle Diagram
FINANCIAL RATIOS
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PROFITABILITY RATIO
Return on Sales
Net Income ÷ Net Sales
Also known as "net profit margin" or "net profit rate", it measures the percentage of income derived from dollar sales. Generally, the higher the ROS the better.
Return on Assets
Net Income ÷ Average Total Assets
In financial analysis, it is the measure of the return on investment. ROA is used in evaluating management's efficiency in using assets to generate income.
Gross Profit Rate
Gross Profit ÷ Net Sales
Evaluates how much gross profit is generated from sales. Gross profit is equal to net sales (sales minus sales returns, discounts, and allowances) minus cost of sales.
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LIQUIDITY RATIO
Acid Test Ratio
Quick Assets ÷ Current Liabilities
Also known as "quick ratio", it measures the ability of a company to pay short-term obligations using the more liquid types of current assets or "quick assets" (cash, marketable securities, and current receivables).
Cash Ratio
( Cash + Marketable Securities ) ÷ Current Liabilities
Measures the ability of a company to pay its current liabilities using cash and marketable securities. Marketable securities are short-term debt instruments that are as good as cash.
Current Ratio
Current Assets ÷ Current Liabilities
Evaluates the ability of a company to pay short-term obligations using current assets (cash, marketable securities, current receivables, inventory, and prepayments).
Net Working Capital
Current Assets - Current Liabilities
Determines if a company can meet its current obligations with its current assets; and how much excess or deficiency there is.
LEVERAGE RATIO
Debt-to-Equity Ratio
Total Liabilities ÷ Total Equity
Evaluates the capital structure of a company. A D/E ratio of more than 1 implies that the company is a leveraged firm; less than 1 implies that it is a conservative one.
Times Interest Earned
EBIT ÷ Interest Expense
Measures the number of times interest expense is converted to income, and if the company can pay its interest expense using the profits generated. EBIT is earnings before interest and taxes.
Debt Ratio
Total Liabilities ÷ Total Assets
Measures the portion of company assets that is financed by debt (obligations to third parties). Debt ratio can also be computed using the formula: 1 minus Equity Ratio.
Equity Ratio
Total Equity ÷ Total Assets. Determines the portion of total assets provided by equity (i.e. owners' contributions and the company's accumulated profits). Equity ratio can also be computed using the formula: 1 minus Debt Ratio. The reciprocal of equity ratio is known as equity multiplier, which is equal to total assets divided by total equity.