Gross profit ratio reports the peso value of the gross profit earned for every
peso of sales. We can infer the average pricing policy from the gross profit
margin
GPR= (NET SALES - COGS) ÷ NET SALES
Operating income ratio expresses operating income as a percentage of
sales. It measures the percentage of profit earned from each peso of sales in
the company’s core business operations (Horngren et.al. 2013). A company
with a high operating income ratio may imply a lean operation and have low
operating expenses. Maximizing operating income depends on keeping
operating costs as low as possible (Horngren et.al. 2013).
OIP= OPERATING INCOME ÷ NET SALES
Net profit ratio relates the peso value of the net income earned to every
peso of sales. This shows how much profit will go to the owner for every peso
of sales made.
NET PROFIT RATIO= NET INCOME NET SALES
Return on asset (ROA) measures the peso value of income generated by
employing the company’s assets.
ROA= NET INCOME÷ TOTAL ASSETS or AVERAGE ASSETS
Return on equity (ROE) measures the return (net income) generated by
the owner’s capital invested in the business. Similar to ROA, the denominator
of ROE may also be total equity or average equity.
ROE= NET INCOME ÷ AVERAGE EQUITY OR TOTAL EQUITY
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RATIOS FORMULA
Gross Profit Ratio Net Sales-Cost of Goods Sold
Net Sales
Operating Income Ratio Operating Income
Net Sales
Net Profit Ratio Net Income
Net Sales
Return on assets Net Income
Average Assets
Return on Equity Net Income
Average Equity
Asset turnover measures the peso value of sales generated for every peso of
the company’s assets. The higher the turnover rate, the more efficient the
company is in using its assets.
A. T. = NET SALES÷ TOTAL ASSETS
Fixed asset turnover is the indicator of the efficiency of fixed assets in
generating sales.
F.A.T.= NET SALES÷ AVERAGE FIXED ASSETS OR TOTAL FIXED ASSETS
Inventory turnover is measured based on cost of goods sold and not sales.
As such both the numerator and denominator of this ratio are measured at
cost. It is an indicator of how fast the company can sell inventory. An
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alternative to inventory turnover is “days in inventory”. This measures the
number of days from acquisition to sale.
I.T. = COGS ÷AVERAGE INVENTORY OR TOTAL INVENTORY
Accounts receivables turnover measures the number of times the company
was able to collect on its average accounts receivable during the year.
A.R.T.= NET CREDIT SALES ÷ AVERAGE ACCOUNTS RECEIVeivab
RATIOS FORMULA
Asset Turnover Net Sales
Average Asset
Fixed Asset Turnover Net Sales
Average Fixed Asset
Inventory Turnover Cost of Goods Sold
Average Inventory
Accounts Receivable Turnover Net Sales
Average Accounts Receivable
Debt ratio indicates the percentage of the company’s assets that are financed
by debt. A high debt to asset ratio implies a high level of debt.
DEBT RATIO= TOTAL LIABILITIES ÷ TOTAL ASSETS
Equity ratio indicates the percentage of the company’s assets that are
financed by capital. A high equity to asset ratio implies a high level of capital.
E.R. = TOTAL EQUITY ÷ TOTAL ASSETS
Debt to equity ratio indicates the company’s reliance to debt or liability as a
source of financing relative to equity. A high ratio suggests a high level of debt
that may result in high interest expense.
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DEBT TO EQUITY= TOTAL LIABILITIES ÷ TOTAL SHAREHOLDERS EQUITY
Interest coverage ratio measures the company’s ability to cover the interest
expense on its liability with its operating income. Creditors prefer a high
coverage ratio to give them protection that interest due to them can be paid.
INTEREST COVERAGE RATIO = OPERATING INCOME ÷ INTEREST EXPENSES
Current ratio is used to evaluate the company’s liquidity. It seeks to measure
whether there are sufficient current assets to pay for current liabilities.
Creditors normally prefer a current ratio of 2.
CURRENT RATIO=CURRENT ASSETS ÷ CURRENT LIABILITIES
Quick ratio is a stricter measure of liquidity. It does not consider all the
current assets, only those that are easier to liquidate such as cash and
accounts receivable that are referred to as quick assets.
QUICK RATIO= QUICK ASSETS ÷ CURRENT LIABILITIES
EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA measures the company's overall financial performance. It is often used
as an alternative to other metrics, including earnings, revenue, and income.
EBITDA = NET INCOME+ INTEREST+ TAX + DEPRECIATION AND AMORTIZATION
EXPENSE ÷ TOTAL SALES
RATIOS FORMULA
Equity Ratio Total Equity
Total Asset
Debt Ratio Total Debt
Total Asset
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Debt to Equity Ratios Total Debt
Equity
Interest Coverage Ratio Operating Income
Interest Expense
Current Ratio Current Assets
Current Liabilities
Quick Ratio Quick Assets
Current Liabilities
Accounts Payable Turnover Ratio measures the rate at which a company
pays back its suppliers or creditors who have extended a trade line of credit,
giving them invoice payment terms.
ACCOUNTS PAYABLE TURNOVER= COST OF SALE ÷ AVERAGE ACCOUNTS
PAYABLE
AVERAGE COLLECTION PERIOD The amount of time it takes for a business
to receive payments owed by its clients in terms of accounts receivable (AR).
ACP= 365÷ ACC RECEIVABLE TURNOVER RATIO
