Basic Financial Ratios and Analysis

By Prof. Dr. George S. Mentz, JD, MBA, CWM

05 January, 2007

Ratio Analysis

Prepared by Prof. Mentz, JD, MBA, CWM, CMA

Liquidity Ratios

Current Ratio

Current Assets
Current liabilities

Quick Ratio

Current assets - Inventory
Current liabilities

Cash Ratio

Cash + Marketable securities
Current liabilities

Cash Flow from Operations Ratio

Cash flow from operations
Current liabilities

Defensive Interval

365*(Cash + Marketable securities + Accounts receivable)
Projected expenditures

Net Working Capital to Total Assets

Net working capital
Total assets

Asset - Utilization Ratios

Total Asset Turnover Ratio

Sales
Average total sales

Fixed Asset Turnover Ratio

Sales
Average fixed assets

Inventory Turnover Ratio

Cost of goods sold
Average inventory

Average # Days Inventory in Stock

365
Inventory turnover ratio

Receivables Turnover Ratio

Sales
Average receivables

Average # of Days Receivables are Outstanding

365
Receivables turnover ratio

Profitability Ratios

Gross Profit Margin Ratio

Gross profit
Sales

Net Profit Margin Ratio

Net income
Sales

Pretax Margin Ratio

EBT
Sales

Basic Earning Power

EBIT
Average total assets

Return on Assets (ROA)

Net income
Average total assets

Return on Equity (ROE)

Net income
Total equity

Debt Utilization Ratios

Debt to Equity Ratio

Total debt
Total equity

Total Debt to Total Assets Ratio or
Debt to Total Capital Ratio

Total debt or Total debt
Total assets Total debt + Total equity

Times Interest Earned Ratio

EBIT
Interest expense

Cash Coverage Ratio

EBIT + Depreciation
Interest expense

Market Value

Price/Earnings Ratio

Price per share
Earnings per share

Book Value per Share

Common equity
Shares outstanding

Market/Book Ratio

Market price per Share
Book vslue per share

Limited Ratio Analysis

Current assets
Current liabilities

This is simply the current ratio, and shows how well a firm's short term liabilities are covered by its short term assets.

Current assets - inventory
Current liabilities

A more conservative measure of the above ratio that includes all current assets other than inventory.

Net income
Average total capital

Indicates what percentage of the firm's capital (debt and equity) results in bottom line net profit.

Cash flow from operations
Average total assets

Shows what percentage of the firm's total assets generate cash flows from its primary business.

Sales
Average total capital

Indicates how much revenue is being generated from a firm's capital.

Cash
Total assets

Shows how much cash is on hand in proportion to the firm's total assets.

Current assets
Total assets

Shows what percentage of a firm's total assets are available for conversion to cash within one year from the date of the balance sheet.

DebtEquity

Shows the proportion of all debt to equity within the capital structure of the firm.

Net liabilities
Total capital

Net liabilities is another term for long term debt. This ratio shows what percentage of a firm's capital is long term debt.

Inventory
Current assets

This ratio shows what percentage of current assets is represented by inventory.

About the Authors
George Mentz is a licensed attorney and is trained in Internatinal Law and Business. Mentz has an earned MBA from an AACSB Accredited Business School and holds a Doctorate Degree or Juris Doctorate Degree from an ABA Accredited USA Law School. Prof. Mentz has faculty appointments and credentials in Silicon Valley, Miami, Chicago, Denver, Hong Kong, Singapore, and The Bahamas. . Prof. Mentz is a consultant providing expertise to Fortune 100 companies in several countries. The first person in the United States to achieve "Quad Designation" Status as a JD, MBA, licensed financial planner, and Certified Financial Consultant. Prof. Mentz has authored/published over 15 Books and has been featured or quoted in the Wall Street Journal, The Hindu National, El Norte Latin America, the Finanical Times, The China Daily, & The Arab Times. His research, publications, and speeches have been syndicated into over 100 countries. Prof. Mentz has recently been elected to the advisory board of the GFF Global Finance Forum in Switzerland and the World E-Commerce Forum in London, England. He also is on the Advisory Board of The ERISA Fiduciary Guild. Mentz was Editor and Chief for the Original Tax and Estate Planning Law Review at Loyola University (A Loyola University Chartered Organization). One of the First Lawyers in the USA to be credentialed and compliant to teach law in all 50 states in law school, graduate and undergraduate colleges and universities. Holds professor faculty appointment at Graduate LLM Law Program . Prof. Mentz has established Certification and Executive Training Accreditation Programs in over 50 Countries around the world including : UK, China, Mexico, Africa, Singapore, Taiwan, USA, Bahamas, India, Russia, EU, Philippines, Saudi Arabia, Canada, Vietnam, The Bahamas and more. General Counsel and Attorneyand Board of Standards Chair Prof. Mentz has recently been awarded a National Faculty Award, a Distinguished Faculty Award and a Meritorious Service Medal for Charitable Service. Prof Mentz has taught over 150 college and graduate courses in his faculty career.