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Key Financial Ratios

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15 Key Financial Ratios

These are the 15 key financial ratios and concepts, along with the formulas for calculating them, how they are used, and examples of good performance. This tool is particularly useful for leaders who do not have a financial background but need to understand financial yardsticks.

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Here are the 15 most commonly used financial ratios:

Current

Formula: current assets / current liabilities
Comments: Measures cash reserves; 2 is solid; varies by industry.

Quick

Formula: current assets minus inventory / current liabilities
Comments: Indicates what a company can realize in cash right away; 1 is solid.

EBITA

Formula: earnings minus interest, taxes and amortization.
Comments: Indicates underlying financial performance by stripping away non-revenue based factors.

Debt to assets

Formula: long-term debt / total assets
Comments: Measures relative security of current debt; .33 is good.

Debt to equality

Formula: total debt / total equality
Comments: Provides insight into company’s financial strategy.

Leverage

Formula: total assets / stockholders equity
Comments: Shows how many assets each dollar of equity supports.

Inventory turnover

Formula: total sales / total value of inventory
Comments: Measures how much money is tied up in inventory.

Average collection period

Formula: accounts receivable / sales per day
Comments: Use to assess collection policies and procedures; if terms are net 30, then 30 to 40 is good.

Sales to fixed assets

Formula: sales / assets
Comments: Shows sales efficiency; must be compared to industry average.

Profit margin on sales

Formula: net income / total sales
Comments: Shows profit efficiency; must be compared to industry average.

Return on Equity

Formula: net income / stockholders equity
Comments: Shows yield to investors; 15 percent considered good.

Return on total assets

Formula: a) net income/total assets b) net income + after tax interest / total assets
Comments: Shows yield on assets; second formula (b) perhaps more accurate because total assets include debt.

Return on investment

Formula: net income / shareholders equity
Comments: Same as return on equity.

Price to cash flow

Formula: stock price per share / cash flow per share
Comments: Evaluates stock performance; sum of net income and depreciation can be used to compute cash flow.

Price/earnings ratio (also known as P/E)

Formula: price per share / earnings per share
Comments: Evaluates stock performance; must be compared with industry, stock market, and company history.

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