What ratio measures the proportion of total assets financed by the firms creditors?
|
Financial ratios are used to provide a quick assessment of potential financial difficulties and dangers. Ratios provide you with a unique perspective and insight into the business. If a financial ratio identifies a potential problem, further investigation is needed to determine if a problem exists and how to correct it. Although there are often specific benchmarks attached to ratios to indicate when there is cause for concern, ratios should also be thought of as a continuum from weak to strong with the stronger the ratio the better. Ratios can identify problems by the size of the ratio but also by the direction of the ratio over time. Show
Liquidity RatiosCurrent Ratio - A firm’s total current assets are divided by its total current liabilities. It shows the ability of a firm to meets its current liabilities with current assets. Quick Ratio - A firm’s cash or near cash current assets divided by its total current liabilities. It shows the ability of a firm to quickly meet its current liabilities. Net Working Capital Ratio - A firm’s current assets less its current liabilities divided by its total assets. It shows the amount of additional funds available for financing operations in relationship to the size of the business. Asset Management RatiosDays Sales Outstanding - A firm’s accounts receivables divided by its average daily sales. It shows the average length of time a firm must wait after making a sale before it receives payment. Fixed Asset Turnover Ratio - A firm’s total sales divided by its net fixed assets. It is a measure of how efficiently a firm uses its plant and equipment. Inventory Turnover Ratio - A firm’s total sales divided by its inventories. It shows the number of times a firm’s inventories are sold-out and need to be restocked during the year. Total Assets Turnover Ratio - A firm’s total sales divided by its total assets. It is a measure of how efficiently a firm uses its assets. Debt Management RatiosDebt to Asset Ratio - A firm’s total debt divided by its total assets. It is a measure of how much of the firm is debt financed. Debt Coverage Ratio or Debt Service Coverage Ratio (DSCR) - A firm’s cash available for debt service divided by the cash needed for debt service. It is a measure of a firm’s ability to service its debt obligations. Times Interest Earned Ratio (TIE) - A firm’s earnings before interest and taxes (EBIT) divided by its interest charges. It shows a firm’s ability to meet its interest payments. It is also called the interest coverage ratio. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Coverage Ratio - A firm’s cash flow available to meet fixed financial charges divided by the firm’s fixed financial charges. It shows the ability of a firm to meet its fixed financial charges. Profitability RatiosProfit Margin on Sales - A firm’s net income divided by its sales. It shows the ability of sales to generate net income. Basic Earning Power (BEP) - A firm’s earnings before interest and taxes (EBIT) divided by its total assets. It shows the earning ability of a firm’s assets before the influence of taxes and interest (leverage). Return on Total Assets (ROA) - A firm’s net income divided by its total assets (both debt and equity supported assets). It shows the ability of the firm’s assets to generate net income. Interest expense is added back to net income because interest is a form of return on debt-financed assets. Return on Equity (ROE) - A firm’s net income divided by its equity. It shows the ability of the firm’s equity to generate profits. Return on Investment (ROI) - A firm’s net income divided by the owner’s original investment in the firm. Earnings per Share - A firm’s net income per share of stock. Market Value RatiosPrice/Earnings Ratio (P/E) - The price per share of a firm is divided by its earnings per share. It shows the price investors are willing to pay per dollar of the firm’s earnings. Price/Cash Flow Ratio - The price per share of a firm divided by its cash flow per share. It shows the price investors are willing to pay per dollar of net cash flow of the firm. Market-to-book value (M/B) - The market value of a firm is divided by its book value. Don Hofstrand, retired extension value added agriculture specialist, The use of financial figures to gain significant information about a company What are Financial Ratios?Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more. Financial ratios are grouped into the following categories:
Uses and Users of Financial Ratio AnalysisAnalysis of financial ratios serves two main purposes: 1. Track company performanceDetermining individual financial ratios per period and tracking the change in their values over time is done to spot trends that may be developing in a company. For example, an increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk. 2. Make comparative judgments regarding company performanceComparing financial ratios with that of major competitors is done to identify whether a company is performing better or worse than the industry average. For example, comparing the return on assets between companies helps an analyst or investor to determine which company is making the most efficient use of its assets. Users of financial ratios include parties external and internal to the company:
Liquidity RatiosLiquidity ratios are financial ratios that measure a company’s ability to repay both short- and long-term obligations. Common liquidity ratios include the following: The current ratio measures a company’s ability to pay off short-term liabilities with current assets: Current ratio = Current assets / Current liabilities The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets: Acid-test ratio = Current assets – Inventories / Current liabilities The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents: Cash ratio = Cash and Cash equivalents / Current Liabilities The operating cash flow ratio is a measure of the number of times a company can pay off current liabilities with the cash generated in a given period: Operating cash flow ratio = Operating cash flow / Current liabilities Leverage Financial RatiosLeverage ratios measure the amount of capital that comes from debt. In other words, leverage financial ratios are used to evaluate a company’s debt levels. Common leverage ratios include the following: The debt ratio measures the relative amount of a company’s assets that are provided from debt: Debt ratio = Total liabilities / Total assets The debt to equity ratio calculates the weight of total debt and financial liabilities against shareholders’ equity: Debt to equity ratio = Total liabilities / Shareholder’s equity The interest coverage ratio shows how easily a company can pay its interest expenses: Interest coverage ratio = Operating income / Interest expenses The debt service coverage ratio reveals how easily a company can pay its debt obligations: Debt service coverage ratio = Operating income / Total debt service Efficiency RatiosEfficiency ratios, also known as activity financial ratios, are used to measure how well a company is utilizing its assets and resources. Common efficiency ratios include: The asset turnover ratio measures a company’s ability to generate sales from assets: Asset turnover ratio = Net sales / Average total assets The inventory turnover ratio measures how many times a company’s inventory is sold and replaced over a given period: Inventory turnover ratio = Cost of goods sold / Average inventory The accounts receivable turnover ratio measures how many times a company can turn receivables into cash over a given period: Receivables turnover ratio = Net credit sales / Average accounts receivable The days sales in inventory ratio measures the average number of days that a company holds on to inventory before selling it to customers: Days sales in inventory ratio = 365 days / Inventory turnover ratio Profitability RatiosProfitability ratios measure a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity. Common profitability financial ratios include the following: The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold: Gross margin ratio = Gross profit / Net sales The operating margin ratio compares the operating income of a company to its net sales to determine operating efficiency: Operating margin ratio = Operating income / Net sales The return on assets ratio measures how efficiently a company is using its assets to generate profit: Return on assets ratio = Net income / Total assets The return on equity ratio measures how efficiently a company is using its equity to generate profit: Return on equity ratio = Net income / Shareholder’s equity Learn more about the different profitability ratios in the following video: Market Value RatiosMarket value ratios are used to evaluate the share price of a company’s stock. Common market value ratios include the following: The book value per share ratio calculates the per-share value of a company based on the equity available to shareholders: Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total common shares outstanding The dividend yield ratio measures the amount of dividends attributed to shareholders relative to the market value per share: Dividend yield ratio = Dividend per share / Share price The earnings per share ratio measures the amount of net income earned for each share outstanding: Earnings per share ratio = Net earnings / Total shares outstanding The price-earnings ratio compares a company’s share price to its earnings per share: Price-earnings ratio = Share price / Earnings per share Related ReadingsThank you for reading CFI’s guide to financial ratios. To help you advance your career in the financial services industry, check out the following additional CFI resources:
Which ratio indicates the proportion of assets?The proprietary ratio (also known as the equity ratio) is the proportion of shareholders' equity to total assets, and as such provides a rough estimate of the amount of capitalization currently used to support a business.
Which ratios are used by creditors?Debt-to-assets and debt-to-equity are two ratios often used for a quick check of a company's debt levels.
What ratio is used to determine how a company is financed?The shareholder equity ratio shows how much of a company's assets are funded by issuing stock rather than borrowing money. The closer a firm's ratio result is to 100%, the more assets it has financed with stock rather than debt.
What are the 4 types of ratio?Types of Ratio Analysis. Liquidity Ratios. Liquidity ratios measure a company's ability to pay off its short-term debts as they become due, using the company's current or quick assets. ... . Solvency Ratios. ... . Profitability Ratios. ... . Efficiency Ratios. ... . Coverage Ratios. ... . Market Prospect Ratios.. |
