Understanding Financial Ratios

Background

The Ratios Report gives you the main performance indicators of the company and are divided into four sections:

  • Liquidity Ratios
  • Profitability Ratios
  • Financial Leverage Ratios
  • Efficiency Ratios

Liquidity Ratios

  • Working Capital
    • Definition: The amount of capital available for day-to-day financial operations
    • Formula: Currents Assets – Current Liabilities
  • Current Ratio
    • Definition: Measures a company’s ability to cover its short and long-term financial obligations
    • A Current Ratio over 1 is ideal
    • Formula: Currents Assets / Current Liabilities

Profitability Ratios

  • Net Profit Margin
    • Definition: The percentage of Revenues that are left After all expenses, depreciation, amortization, interests, and Taxes are deducted
    • Formula: Net Profit / Net Revenue
  • Return On Assets (ROA)
    • Definition: The percentage of Net Profit relative to the company’s total Assets.
      • The ROA demonstrates how well a company is using its assets/ resources to generate profit
    • Formula: Net Profit / Total Assets
  • Operating Income Margin
    • Also Referred as Earnings Before Interest, Taxes, Depreciation, Amortization or EBITDA Margin
    • Definition: The percentage of Revenues that are left Before expenses, depreciation, amortization, interests, and taxes are deducted
    • Formula: Operating Income / Revenues
  • Return On Equity (ROE)
    • Definition: The percentage of Net Income earned in comparison to the total Equity of a company. A higher the ROE means that a company is using its equity efficiently to generate profit. A ROE over 20% is considered very positive.
    • Formula: Net Income / Equity
  • Gross Profit Margin
    • Definition: The percentage of Profit left after deducting Only Cost of Goods Sold (COGS) or direct costs of operations. The Gross Profit Margin excludes Variable and Fixed Costs, Depreciation, Amortization, Interests, and taxes
    • Formula: Gross Profit / Revenue

Financial Leverage Ratios

  • Debts To Assets
    • Definition: The percentage of the company total assets that were financed or funded by debt
    • Formula: Total Liabilities / Total Assets
  • Capitalization
    • Definition: The percentage of debt in a company’s total capital structure
    • Formula: (Long Term Liability) / (Long Term Liability + Owner’s Equity)
  • Debt To Equity
    • Definition: The percentage of debt used to finance a company’s assets relative to its equity
    • Formula: Total Liabilities / Total Equity
  • Debt To Working Capital
    • Definition: The percentage of debt relative to a company’s short term financial strength. It helps to determine if a company is able to meet its short term financial obligations.
    • Formula: (Long Term Liability) / (Current Assets – Current Liabilities)

 Efficiency Ratios

  • Cash Turnover
    • Definition: The amount of times a company’s replenished its cash account/balance. A high Cash Turnover Ratio is considered positive.
    • Formula: Revenue / Cash
  • Revenue (Sales) To Working Capital
    • Definition: Determines how well a company is using its cash to generate sales
    • Formula: Revenue / (Current Assets – Current Liabilities)
  • Fixed Asset Turnover
    • Definition: Determines how well a company is using its fixed assets to generate sales
    • Formula: Revenue / Fixed Assets
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Understanding Financial Ratios

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