Financial Ratios
Item
# Indicators of Profitability
1 Rate of Return on Sales
Rate of Return on Total
2 Assets
3 Asset Turnover
4 Gross profit ratio
5 Operating Ratio
Rate of Return on Current
6 Assets
7 Current Asset Turn-over
Rate of Return per Current
8 Asset Turn-over
Rate of Return on Working
9 Capital
10 Working Capital Turn-over
Rate of Return per Working
11 Capital Turn-over
Formula
Net Income
Net Sales
Return on sales x Asset Turnover
or
Net Income
Average Total Assets
Net Sales
Average Total Assets or Total
Investment in the business
Gross Profit
Net Sales
Cost of Sales + Operating
Expenses
Net Sales
Net Income
Average Current Assets
Cost of Sales + Operating
Expenses (excluding charges not
requiring current assets)
Average Current Assets
Rate of Return on Current Assets
Current Asset Turnover
Net Income
Average Working Capital
Cost of Sales + Operating
Expenses (excluding charges not
requiring working capital)
Average Working Capital
Rate of Return on Working Capital
Working Capital turn-over
Significance
Indicates the amount of net income per peso of sales
or the profitability based on sales.
Indicates the profitability in the use of the total assets
or total capital, both borrowed and invested.
Indicates the efficiency in the use of total resources.
Indicates the gross margin per peso of sales. Used in
determining the adequacy of gross margin to cover
operating expenses and provide desired profit.
Indicates what portion of sales in absorbed by
operating costs.
Indicates the profitability in the use of current assets.
Indicates the rate at which current assets are being
used.
Indicates the percentage of profit every time current
assets are used.
indicates the profitability in the use if working
capital
Indicates the rate at which working capital is being
used
Indicates the percentage of profit every time working
capital is used.
12 Invested Capital Turnover Net Sales Indicates the rate at which owners' capital is being
Average Owner's Equity used or the rate at which assets provided by owners
are being used.
Rate of Return on Owners' Indicates profitability in the use of invested capital or
13 Equity 1. Net Income the amount of return per peso of owners' equity
Ave. Owners' Equity

2. Rate of return on Sales x

Invested Capital Turnover

Net Income less preferred stock

14 Earnings per Share dividend requirement Indicates the amount of returns o each share of
common stock and the ability to pay dividends.
Ave. No. of Common Shares
Outstanding

Net Income less preferred stock Indicates the amount of returns on each share of
15 Price – earnings ratio dividend requirement common stock and the ability to pay dividends.
Ave. No. of Common Shares
outstanding

Capitalization Rate or
Earnings per share
16. Earnings/Price ratio Indicates the rate at which the stock market is
Market price per share apparently capitalizing the value of current earnings.

17. Dividends per share Dividends paid or declared

Common shares outstanding Shows the amount of distributed earnings per share.

18. Yield on Common Stock Dividends per share Shows the percentage of distributed earnings based
on market value.
Market Value per share of common
stock

19. Payout ratio Dividends per share Indicates the percentage of distributed earnings based
Earnings per share on earnings made per share

Retained Earnings
20. Retained Earnings to Capital Indicates the profitability of dividend declaration
Stock Capital Stock

21. Market Price to book value per Market price per share
Indicates whether the stock is undervalued or not.
share Book value per share
Indicators of Liquidity or Short-term Solvency
Formula Significance
Current Assets
1. Current Ratio Current liabilities Indicates the ability to pay current obligations

Quick assets
2. Acid test ratio Current assets Indicates the liquidity of the total assets.

Current assets
3. Current assets to Total Assets Total assets Indicates the liquidity of the total assets.

Ratio if each current asset item to Each current asset item Indicate the liquidity of the total current assets and
4.
total current assets Total current assets the distribution thereof.

Indicates the number of times average amount of

Net credit sales
5. Receivable turn-over receivables is collected during the period and the
Average receivables
efficiency in collection

Indicates the average age of receivables or the

6. Average collection period 360
number of days to collect average receivables.
Receivables turn-over
Indicates the number of times average inventory
Merchandise inventory (or Finished
7. Cost of goods sold was sold during the period and over/under
goods) turnover
Average inventory investment in inventory.
Cost of goods sold + operating
expenses (excluding charges Indicates the rate at which current assets are being
8. Current asset turn-over
requiring current assets) used and adequacy of current assets.
Average current assets
Indicates the number of times the amount of
9. Payable Turn-over Net credit purchases
average payables is being paid.
Average payables

Measures of Stability or Long-term Solvency

Measures the proportion of borrowed capital to

1. Debt/Equity ratio Total liabilities
invested capital
Owner’s equity

2. Equity/debt ratio Owner’s equity Indicates the margin of safety to creditors.

Total liabilities
Proprietary (Equity) Ratio or Indicates what portion of total assets is provided by
3. Owner’s equity
Owner’s equity to total assets owners or stockholders.
Total assets
Debt ratio or total liabilities to total Indicates what portion of total assets is provided by
4. Total liabilities
assets creditors.
Total assets
Indicates the portion of owners’ equity invested in
5. Fixed assets to total owner’s equity Fixed assets
fixed assets.
Total owner’s equity
Fixed assets to total equity (or total Indicates the portion of long term debt secured by
6. Fixed assets
assets) fixed assets
Total liabilities and owners’ equity
7. Book value per share Indicates the book value of net assets for every
 Common stock equity
Number of common shares outstanding share of common stock.
outstanding

8. Number of times interest is earned Income before interest and taxes Indicates the company’s ability to pay fixed interest
Annual interest charges