FINANCIAL RATIOS
PROFIT MARGIN %
DEFINITION: Net Income, or profit, expressed as a
percentage of sales. For example, if a
company has a profit margin of 10%, for every dollar of sales, 10% of those
dollar sales represents profit.
ASSESSMENT: Profit Margin is a primary measure of a
companys profitability.
FORMULA: Net Income / Sales = Profit Margin (%)
DEBT RATIO %
DEFINITION: The degree (%) to which assets are
purchased through debt (liabilities).
(Note: Most companies finance
their assets in one of two ways: debt
or stock)..
ASSESSMENT: The Debt Ratio is a primary measure with
which to gauge the degree a company is leveraged or financed through debt..
FORMULA: Total Debt / Total Assets = Debt Ratio (%)
CURRENT RATIO #
DEFINITION: The ratio of current assets to
current liabilities represents the number of times a company can pay current
debts through current assets such as cash.
ASSESSMENT: The Current Ratio is a measure of a
companys liquidity (how quickly a company can turn noncash assets into cash),
and of a companys abiloity to meet future obligations (i.e., pay future
debts)..
FORMULA: Current Assets / Current Liabilities =
Current Ratio (#)
RETURN ON ASSETS %
DEFINITION: Net Income, or profit, expressed as a
percentage of total assets. For
example, if a company has an ROAof 10%, the company will generate a net
income equivalent to 10% of its assets.
In other words, as a percentage, what is the net income produced by a
companys assets.
ASSESSMENT: ROAis a measure of an assets or a
companys efficiency and profitability.
FORMULA: Net Income / Average Total Assets* = ROA (%)
INVENTORY TURNOVER #
DEFINITION: The number of times a company sells
its inventory in a year.
ASSESSMENT: Inventory Turnover is the primary
measure of a companys ability to sell or moveinventory.
FORMULA: Cost of Goods Sold / Average Inventory** (%)
*Average Total Assets = (Current Year Total Assets +
Prior Year Total Assets ) / 2
**Average Inventory = (Current Year Inventory +
Prior Year Inventory) / 2