Group 5 - Ratio Analysis

I. Introduction
A. What are financial ratios?
These are ratios derived from the financial statements as a
tool of analyzing the financial condition of the company.
B. Interested Parties
1. Shareholders/Investors (both current and prospect) –
Shareholders and investors use financial ratios as a tool in
observing the company’s stewardship of assets and capital.
Financial ratios can also indicate changes in share prices
which is vital for shareholders and investors.
2. Creditors – Creditors are concerned about the liquidity
of the company and its ability to pay interest and principal
payments.
3. Management – The management is concerned about
every information the shareholders and creditors seek.
4. Public – The public is concerned about the reliability of
the firm in terms of the goods and services that they render.

C. Types of Ratio Comparisons

1. Cross Sectional Analysis
This is the comparison of different firm’s financial ratios
at the same point of time.
a) Benchmarking – Firms compare its ratio values to
those of a key competitor or group of competitors that
it wishes to emulate.
2. Time Series Analysis
This is the comparison of current to past performance
that enable analysts to assess the firms progress.
a) Trend Analysis – Example of a Time Series Analysis
3. Combined Analysis
It is the combination of Cross Sectional Analysis and
Time Series Analysis.
D. Cautions about using Ratio Analysis
1. Ratios merely indicate possibilities – just because ratios
derived from the financial statements deviate from the norm,
doesn’t mean it already pointed out the problem. Additional
analysis is needed.
2. A single ratio should not generalize the overall
performance of a firm.
3. Usage of comparative date or specific point in time –
ratios that are compared must be within the same point in
time during the year.
4. It is preferable to use audited financial statements – the
usage of audited financial statements than that of one that is
not audited has a higher probability of reflecting the true
financial condition of the company through the financial
ratios.
5. Financial data used as basis should be developed in
the same way
6. The effect of inflation – Results can be distorted by
inflation. The difference of book values, replacement costs
and net realizable values due to inflation must be considered.
This is also true with adjustments such as write-offs,
allowances, and provisions.

E. Categories of Financial Ratios

1. Liquidity Ratios
– are ratios that are primarily concerned with the firm’s
ability to make interest and principal payments as they
become due.
2. Activity Ratios
- are ratios that measure the speed at which various
accounts are converted into sales or cash.
3. Debt Ratios
- are ratios that reflect the debt position of the firm
which indicates the amount of other people’s money being
used by the company to generate profit.
4. Profitability Ratios
- are ratios that that evaluates the firm’s profit with
respect to a given level of sales, a certain level of assets, or
the owners’ investment.
II. The Financial Ratios

Liquidity Ratios

The relationship of current assets to current liabilities is an important

indicator of the degree to which a firm is liquid. Working capital and the
components of working capital also provide measures of the liquidity of a
firm. Ratios that directly measure a firm’s liquidity provide clues
concerning whether or not a firm can pay its maturing obligations.

a. Current Ratio or Working Capital Ratio

The current ratio expresses the relative relationship between current
assets and current liabilities.
 significance: test of short-term debt paying ability
 Formula:

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

b. Quick Ratio or Acid-test Ratio

A quick measure of the debt-paying ability of a company is referred
to as the quick ratio or acid-test ratio. The quick ratio expresses the
relationship of quick assets (cash, marketable securities, and accounts
receivable) to current liabilities. Inventory and prepaid expenses are not
considered quick assets because they may not be easily convertible into
cash. The acid-test ratio is a more severe test of a company’s short-term
ability to pay debt than is the current ratio. A rule of thumb for the quick
ratio is suggested as 1:1. Again, industry practices and the company’s
special operating circumstances must be considered.
 significance: measures the firm’s ability to pay its short-term debts
from its most liquid assets without having to rely on inventory and
prepaid expense

 Formula:

𝑪𝒂𝒔𝒉 + 𝑪𝒂𝒔𝒉 𝑬𝒂𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔 + 𝑵𝒆𝒕 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔

+𝑴𝒂𝒓𝒌𝒆𝒕𝒂𝒃𝒍𝒆 𝑺𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 (𝑸𝒖𝒊𝒄𝒌 𝑨𝒔𝒔𝒆𝒕𝒔)
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
c. Cash Ratio
The cash ratio, also known as the doomsday ratio, is a more severe
test of liquidity than the acid-test ratio. This ratio is most relevant for
companies in financial distress. The doomsday ratio name comes from the
worst-case assumption that the business ceases to exist and only the cash
on hand is available to meet currently maturing obligations.
 significance: a more conservative variation in quick ratio, it tests
short-term liquidity without having to rely on marketable securities,
receivables, inventory and prepaid expenses
 Formula:

𝑪𝒂𝒔𝒉 + 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔 + 𝑴𝒂𝒓𝒌𝒆𝒕𝒂𝒃𝒍𝒆 𝑺𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔

𝑪𝒂𝒔𝒉 𝒓𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

d. Working Capital
Working Capital is equal to current assets. Net working capital is
equal to current assets less current liabilities. Current assets are those
assets that are expected to be converted into cash or used up within 1
year. Current liabilities are those liabilities that must be paid within 1 year;
they are paid out of current assets. Net working capital is a safety cushion
to creditors. A large balance is required when the entity has difficulty
borrowing on short notice.
 Formula:

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

e. Defensive Interval Ratio

It is a financial metric that indicates the number of days that a
company can operate without needing to access noncurrent asset, long
term assets whose full value cannot be obtain without the current
accounting year.
 Significance: reflects the percentage of near cash items to the daily
operating cash flow
 Formula:

𝑸𝒖𝒊𝒄𝒌 𝑨𝒔𝒔𝒆𝒕𝒔
𝑫𝒆𝒇𝒆𝒏𝒔𝒊𝒗𝒆 𝑰𝒏𝒕𝒆𝒓𝒗𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 =
𝑷𝒓𝒐𝒋𝒆𝒄𝒕𝒆𝒅 𝑫𝒂𝒊𝒍𝒚 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
Activity Ratios
Activity (asset utilization, turnover) ratios are used to determine how
quickly various accounts are converted into sales or cash.

a. Inventory Turnover
The inventory turnover ratio establishes the relationship between the
volume of goods sold and inventory.
 significance: indicates if a firm holds excessive stocks of inventories
that are unproductive.
 Formula:

𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅

𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

b. Average Age of Inventories or Number of Days’ Sales of Inventory

The number of days in inventory provides some idea of the age of
the inventory and the days’ supply in inventory. It also indicates whether a
company is over or under stocking its inventory.
 significance: measures the average number of days that inventory is
held before sale
 Formula:

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒀𝒆𝒂𝒓

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 =
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐

c. Accounts Receivable Turnover

The accounts receivable turnover gives the number of times
accounts receivable is collected during the year.
 significance: measures the number of times average accounts
receivable is collected during the year
 Formula:

𝑵𝒆𝒕 𝑪𝒓𝒆𝒅𝒊𝒕 𝑺𝒂𝒍𝒆𝒔

𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆
d. Average Collection Period
The average collection period (the number of days' sales-in-
receivables ratio) is the number of days it takes to collect on receivables.
 significance: measures the average number days to collect a
receivable
 Formula:

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒀𝒆𝒂𝒓

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐

e. Accounts Payable Turnover

The relationship of accounts payable to credit purchases of the
period can provide information concerning the proportion of payables
outstanding.
 significance: measures the number of times average accounts
payable is paid during the year
 Formula:

𝑵𝒆𝒕 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆

f. Average Payment Period or Average Age of Payables or Number of Days’

Purchases of Payables
The days’ purchases in accounts payable determines the average
number of days that it takes for the company to pay short-term creditors.
This ratio is used by creditors and financial management to measure the
extent to which accounts payable represents current rather than overdue
obligations. Accounts payable period (the number of days' purchases in
payables) is useful when compared to the credit terms gives by suppliers.
 significance: measures the average number days to pay a payable
 Formula:

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒀𝒆𝒂𝒓

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐
g. Cash Conversion Cycle
The cycle begins with a purchase of inventory on account followed
by the account payment, after which the item is sold and the account is
collected. These three balances can be translated into days of sales and
used to measure how well a company efficiently manages non-cash
working capital. This measure is termed the cash conversion cycle or cash
cycle. This is the number of days that pass before we collect the cash from
a sale, measured from when we actually pay for the inventory. This cycle is
often called from cash to cash.
 significance: measures the average number days to convert
inventories to cash
 Formula:

𝑪𝒂𝒔𝒉 𝑪𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝑪𝒚𝒄𝒍𝒆 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 +

𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 − 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑷𝒂𝒚𝒂𝒃𝒍𝒆𝒔

Debt Ratios
Debt ratios measure the extent to which an organization uses debt
to fund its operations, as well as the ability of the entity to pay for that debt.
These ratios are important to investors, whose equity investments in a
business could be put at risk if the debt level is too high. Lenders are also
avid users of these ratios, to determine the extent to which loaned funds
could be at risk.

a. Total Debt Ratio

The debt ratio compares total liabilities (total debt) to total assets. It
shows the percentage of total funds obtained from creditors. Creditors
would rather see a low debt ratio because there is a greater cushion for
creditor losses if the firm goes bankrupt. The rule of thumb is: The debt
portion should be less than 50%.
 significance: measures the percentage of funds provided by
creditors
 Formula:

𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
b. Times Interest Earned Ratio
The number of times interest is earned ratio is a measure of the debt
position of a firm in relation to its earnings. This ratio emphasizes the
importance of a company’s covering total interest charges. The ratio
indicates the company’s ability to meet interest payments and the degree
of safety available to creditors. Concern over the impact of interest
expense differs as between companies, different stages of the business
cycle, and stages of the life cycle of the business.
 significance: indicates the margin of safety for payment of fixed
interest charges
 formula:

𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙𝒆𝒔

𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝑹𝒂𝒕𝒊𝒐 =
𝑨𝒏𝒏𝒖𝒂𝒍 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒉𝒂𝒓𝒈𝒆𝒔

c. Total Equity Ratio

The shareholder’s equity to total assets ratio measures the proportion
of the firm’s assets that are provided or claimed by the shareholders. The
ratio is a measure of the financial strength or weakness of the firm. If the
shareholder’s equity is a small proportion of total assets, the firm may be
viewed as being financially weak, because the shareholders would be
viewed as having a relatively small investment in the firm. On the other
hand, a high ratio of shareholder’s equity to assets can represent a
relatively large degree of security for the firm, but it also indicates that the
firm is not highly leveraged.
 significance: compares resources provided by creditors with
resources provided by shareholders
 formula:

𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

d. Debt to Equity Ratio

The debt to equity ratio is the reciprocal of the equity to debt ratio.
This ratio measures the amount of leverage used by a company. It
measures the number of times the shareholder’s capital has been
leveraged by the use of debt. A highly leveraged company involves a
substantial use of debt and a limited use of equity. Investors generally
consider a higher debt to equity ratio favorable while creditors favor a
lower ratio. This ratio is an indicator of creditors’ risk. Generally, the higher
relative amount of debt in the capital structures of an enterprise, the larger
the volatility of net earnings.
 significance: compares resources provided by creditors with
resources provided by shareholders
 Formula:

𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚

Profitability Ratios
This are ratios that measure the overall performance of the firm and
its efficiency managing assets, liabilities and equity.

a. Gross Profit Margin Ratio

It shows the relationship between sales and the cost of products
sold. It measures the percentage of gross profit to sales; reveals the
percentage of each peso left over after the business has paid for its
goods.
 Significance: measures the percentage of gross profit to sales

 Formula:

𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

b. Operating Profit Margin Ratio

It measures the overall operating efficiency and incorporates all the
expenses associated with the normal business activities. This ratio indicates
how much of each peso of sales is left over after operating expenses.
 significance: measures operating efficiency

 Formula:

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
c. Net Profit Margin
It measures profitability after considering all revenue and expenses,
including interest, and taxes. It measures the percentage of net income to
net sales; indicates the peso amount of net income the company
receives from each peso of sales.
 significance: measures the percentage of net income to net sales
 Formula:
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 =
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

d. Book Value Per Share

The book value (or equity) per share is usually computed at a price
equal to the equity per share of the outstanding stock. The computation of
book value per share is usually computed on the going concern value of
the enterprise, not on the liquidation value.
 significance: measures the amount of net assets available to the
shareholders of a given type of stock
 formula:
𝑬𝒒𝒖𝒊𝒕𝒚
𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 =
𝑺𝒉𝒂𝒓𝒆𝒔 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈

e. Earnings Per Share (EPS)

Earnings per share (EPS) data are widely used in judging the
operating performance of a business. Earnings per share appears
frequently in financial statements and business publications. It is perhaps
the one most significant figure appearing on the income statement
because it condenses into a single figure the data reflecting the current net
income of the period in relation to the number of shares of stock
outstanding. Separate earnings per share data must be shown for income
form continuing operations and net income. Earnings per share may be
reported for the result form discontinued operations, extraordinary items, or
cumulative effects of changes in accounting principle if they are reported
on the income statement. Current accounting practice requires that
earnings per share be disclosed prominently on the face of the income
statement.
 significance: reflects the company’s earning power
 formula:
 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒂𝒗𝒂𝒊𝒍. 𝒕𝒐 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒉𝒂𝒓𝒆𝒔 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈

f. Diluted earnings per share

This is a pro forma presentation which affects the dilution of earnings
per share that would have occurred if all contingent issuances of common
stock that would individually reduce earnings per share had taken place at
the beginning of the period.
 Significance:
 Formula:

𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑷𝒓𝒆𝒇𝒆𝒓𝒓𝒆𝒅 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔

𝑫𝒊𝒍𝒖𝒕𝒆𝒅 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 = 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒔𝒉𝒂𝒓𝒆𝒔 + 𝑫𝒊𝒍𝒖𝒕𝒆𝒅 𝒔𝒉𝒂𝒓𝒆𝒔

g. Return on Stockholders’ Equity

Return on stockholders’ equity (ROE) indicates management’s
success or failure at maximizing the return to stockholders based on their
investment in the company. This ratio emphasizes the income yield in
relationship to the amount invested. Financial leverage can be estimated
by subtracting return on total assets from return on shareholders’ equity. If
the return on shareholders’ equity is greater than the return on total assets,
financial leverage is positive to the extent of the difference. If there is no
debt, the two ratios would be the same.
 significance: measures the return on the carrying amount of total
equity
 formula:

𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑷𝒓𝒆𝒇𝒆𝒓𝒓𝒆𝒅 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑬𝒒𝒖𝒊𝒕𝒚 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒎𝒎𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚

h. Return on Total Assets

The return on total assets (ROA)) indicates management’s
performance in using the firm’s assets to produce income. There should be
a reasonable return on funds committed to the enterprise. This return can
be compared to alternative uses of the funds. As a measure of
effectiveness, the higher the return is the better.
 significance: indicates whether management is using funds wisely
 formula:

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
III. Illustrative Example – The Learning Company
Liquidity Ratios

a. Current Ratio or Working Capital Ratio

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

𝟏𝟏𝟎𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟓𝟎𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟐. 𝟐𝟎

𝟏𝟐𝟎𝟎𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟓𝟓𝟒𝟎𝟎
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟐. 𝟏𝟕

b. Quick Ratio or Acid-test Ratio

𝑪𝒂𝒔𝒉 + 𝑪𝒂𝒔𝒉 𝑬𝒂𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔 + 𝑵𝒆𝒕 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔
+𝑴𝒂𝒓𝒌𝒆𝒕𝒂𝒃𝒍𝒆 𝑺𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 (𝑸𝒖𝒊𝒄𝒌 𝑨𝒔𝒔𝒆𝒕𝒔)
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

𝟑𝟓𝟎𝟎𝟎 + 𝟏𝟓𝟎𝟎𝟎 + 𝟏𝟓𝟎𝟎𝟎

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟓𝟎𝟎𝟎𝟎
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟏. 𝟑𝟎

𝟑𝟎𝟎𝟎𝟎 + 𝟐𝟎𝟎𝟎𝟎 + 𝟐𝟎𝟎𝟎𝟎

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟓𝟓𝟒𝟎𝟎
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟏. 𝟐𝟔
c. Cash Ratio
𝑪𝒂𝒔𝒉 + 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔 + 𝑴𝒂𝒓𝒌𝒆𝒕𝒂𝒃𝒍𝒆 𝑺𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔
𝑪𝒂𝒔𝒉 𝒓𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

𝟑𝟓𝟎𝟎𝟎 + 𝟏𝟓𝟎𝟎𝟎
𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟓𝟎𝟎𝟎𝟎

𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟏. 𝟎𝟎

𝟑𝟎𝟎𝟎𝟎 + 𝟐𝟎𝟎𝟎𝟎
𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟓𝟓𝟒𝟎𝟎

𝑪𝒂𝒔𝒉 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟎. 𝟗𝟎

d. Working Capital
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝟐𝟎𝟏𝟑 = 𝟏𝟏𝟎𝟎𝟎𝟎 − 𝟓𝟎𝟎𝟎𝟎
𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝟐𝟎𝟏𝟑 = 𝟔𝟎𝟎𝟎𝟎

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝟐𝟎𝟏𝟒 = 𝟏𝟐𝟎𝟎𝟎𝟎 − 𝟓𝟓𝟒𝟎𝟎

𝑾𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝟐𝟎𝟏𝟒 = 𝟔𝟒𝟔𝟎𝟎

e. Defensive Interval Ratio

𝑸𝒖𝒊𝒄𝒌 𝑨𝒔𝒔𝒆𝒕𝒔
𝑫𝒆𝒇𝒆𝒏𝒔𝒊𝒗𝒆 𝑰𝒏𝒕𝒆𝒓𝒗𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 =
𝑷𝒓𝒐𝒋𝒆𝒄𝒕𝒆𝒅 𝑫𝒂𝒊𝒍𝒚 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
NOTE: Projected daily OPEX is 500 USD
𝟔𝟓𝟎𝟎𝟎
𝑫𝒆𝒇𝒆𝒏𝒔𝒊𝒗𝒆 𝑰𝒏𝒕𝒆𝒓𝒗𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟓𝟎𝟎
𝑫𝒆𝒇𝒆𝒏𝒔𝒊𝒗𝒆 𝑰𝒏𝒕𝒆𝒓𝒗𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟏𝟑𝟎 𝒅𝒂𝒚𝒔

𝟕𝟎𝟎𝟎𝟎
𝑫𝒆𝒇𝒆𝒏𝒔𝒊𝒗𝒆 𝑰𝒏𝒕𝒆𝒓𝒗𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟓𝟎𝟎
𝑫𝒆𝒇𝒆𝒏𝒔𝒊𝒗𝒆 𝑰𝒏𝒕𝒆𝒓𝒗𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟏𝟒𝟎 𝒅𝒂𝒚𝒔
Activity Ratios
a. Inventory Turnover
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

𝟓𝟎𝟎𝟎𝟎
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
(𝑰𝒏𝒗𝒕𝒚. 𝑩𝒆𝒈. + 𝑰𝒏𝒗𝒕𝒚. 𝑬𝒏𝒅, )/ 𝟐

𝟓𝟎𝟎𝟎𝟎
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
(𝟒𝟓𝟎𝟎𝟎 + 𝟓𝟎𝟎𝟎𝟎)/ 𝟐

𝟓𝟎𝟎𝟎𝟎
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝟒𝟕𝟓𝟎𝟎

𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = 𝟏. 𝟎𝟓 𝒕𝒊𝒎𝒆𝒔

b. Average Age of Inventories or Number of Days’ Sales of Inventory

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒀𝒆𝒂𝒓
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 =
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐
𝟑𝟔𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 =
𝟏. 𝟎𝟓
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 = 𝟑𝟒𝟑 𝒅𝒂𝒚𝒔

c. Accounts Receivable Turnover

𝑵𝒆𝒕 𝑪𝒓𝒆𝒅𝒊𝒕 𝑺𝒂𝒍𝒆𝒔
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆
𝑮𝒓𝒐𝒔𝒔 𝑺𝒂𝒍𝒆𝒔 − 𝑨𝑹 𝑬𝒏𝒅,
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
(𝑨𝑹 𝑩𝒆𝒈. +𝑨𝑹 𝑬𝒏𝒅. )/ 𝟐
𝟏𝟎𝟎𝟎𝟎𝟎 − 𝟐𝟎𝟎𝟎𝟎
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
(𝟏𝟓𝟎𝟎𝟎 + 𝟐𝟎𝟎𝟎𝟎)/𝟐
𝟖𝟎𝟎𝟎𝟎
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝟏𝟕𝟓𝟎𝟎
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = 𝟒. 𝟓𝟕 𝒕𝒊𝒎𝒆𝒔
d. Average Collection Period
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒀𝒆𝒂𝒓
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐

𝟑𝟔𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝟒. 𝟓𝟕

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 = 𝟕𝟗 𝒅𝒂𝒚𝒔

e. Accounts Payable Turnover

𝑵𝒆𝒕 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆
NOTE: Net Purchases = 80,000 USD
𝑵𝒆𝒕 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
(𝑺. 𝑻. 𝒅𝒆𝒃𝒕, 𝑩𝒆𝒈. +𝑺. 𝑻. 𝒅𝒆𝒃𝒕, 𝑬𝒏𝒅)/ 𝟐

𝟖𝟎𝟎𝟎𝟎
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
(𝟐𝟓𝟎𝟎𝟎 + 𝟐𝟓𝟒𝟎𝟎)/ 𝟐

𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = 𝟑. 𝟏𝟕 𝒕𝒊𝒎𝒆𝒔

f. Average Payment Period or Average Age of Payables or Number of Days’

Purchases of Payables
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒀𝒆𝒂𝒓
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐

𝟑𝟔𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝟑. 𝟏𝟕

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 𝑷𝒆𝒓𝒊𝒐𝒅 = 𝟏𝟏𝟒 𝒅𝒂𝒚𝒔

g. Cash Conversion Cycle

𝑪𝒂𝒔𝒉 𝑪𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝑪𝒚𝒄𝒍𝒆 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 +
𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 − 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒈𝒆 𝒐𝒇 𝑷𝒂𝒚𝒂𝒃𝒍𝒆𝒔
𝑪𝒂𝒔𝒉 𝑪𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝑪𝒚𝒄𝒍𝒆 = 𝟑𝟒𝟑 𝒅𝒂𝒚𝒔 + 𝟕𝟗 𝒅𝒂𝒚𝒔 − 𝟏𝟏𝟒 𝒅𝒂𝒚𝒔
𝑪𝒂𝒔𝒉 𝑪𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝑪𝒚𝒄𝒍𝒆 = 𝟑𝟎𝟖 𝒅𝒂𝒚𝒔
Debt Ratios
a. Total Debt Ratio
𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝟏𝟐𝟓𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟐𝟎𝟎𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟎. 𝟔𝟑

𝟏𝟑𝟓𝟒𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟐𝟐𝟎𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟎. 𝟔𝟐

b. Times Interest Earned Ratio

𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙𝒆𝒔
𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝑹𝒂𝒕𝒊𝒐 =
𝑨𝒏𝒏𝒖𝒂𝒍 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒉𝒂𝒓𝒈𝒆𝒔

𝟐𝟐𝟎𝟎𝟎
𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝟐𝟎𝟏𝟑 =
𝟐𝟎𝟎𝟎
𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝟐𝟎𝟏𝟑 = 𝟏𝟏

𝟏𝟖𝟎𝟎𝟎
𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝟐𝟎𝟏𝟒 =
𝟐𝟎𝟎𝟎
𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝟐𝟎𝟏𝟒 = 𝟗
c. Total Equity Ratio
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝟕𝟓𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟐𝟎𝟎𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟎. 𝟑𝟖

𝟖𝟒𝟔𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟐𝟐𝟎𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟎. 𝟑𝟖

d. Debt to Equity Ratio

𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚

𝟏𝟐𝟓𝟎𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟕𝟓𝟎𝟎𝟎

𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟏. 𝟔𝟕

𝟏𝟑𝟓𝟒𝟎𝟎
𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟖𝟒𝟔𝟎𝟎

𝑫𝒆𝒃𝒕 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟏. 𝟔𝟎

Profitability Ratios
a. Gross Profit Margin Ratio
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

𝟒𝟐𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟏𝟎𝟐𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟎. 𝟒𝟏

𝟑𝟎𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟖𝟎𝟎𝟎𝟎
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟎. 𝟑𝟖

b. Operating Profit Margin Ratio

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 =
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

𝟐𝟐𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 =
𝟏𝟎𝟐𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟑 = 𝟎. 𝟐𝟐

𝟏𝟓𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 =
𝟖𝟎𝟎𝟎𝟎
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝑹𝒂𝒕𝒊𝒐 𝟐𝟎𝟏𝟒 = 𝟎. 𝟏𝟗
c. Net Profit Margin
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 =
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

𝟏𝟐𝟎𝟎𝟎
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝟐𝟎𝟏𝟑 =
𝟏𝟎𝟐𝟎𝟎𝟎

𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝟐𝟎𝟏𝟑 = 𝟎. 𝟏𝟐

𝟗𝟔𝟎𝟎
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝟐𝟎𝟏𝟒 =
𝟖𝟎𝟎𝟎𝟎

𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝟐𝟎𝟏𝟒 = 𝟎. 𝟏𝟐

d. Book Value Per Share

𝑬𝒒𝒖𝒊𝒕𝒚
𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 =
𝑺𝒉𝒂𝒓𝒆𝒔 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈

𝟕𝟓𝟎𝟎𝟎
𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟑 =
𝟒𝟓𝟎𝟎

𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟑 = 𝟏𝟔. 𝟔𝟕

𝟖𝟒𝟔𝟎𝟎
𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟒 =
𝟒𝟓𝟎𝟎

𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟒 = 𝟏𝟗. 𝟐𝟎

e. Earnings Per Share (EPS)
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒂𝒗𝒂𝒊𝒍. 𝒕𝒐 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒉𝒂𝒓𝒆𝒔 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈
NOTE: Assume that they have 500 preferred shares with 600 USD dividends.

𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟑 =

𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟑 =

𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟒 =

𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 𝟐𝟎𝟏𝟒 =

f. Diluted earnings per share

𝑫𝒊𝒍𝒖𝒕𝒆𝒅 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 = (𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒄𝒐𝒎𝒆 −
𝑷𝒓𝒆𝒇𝒆𝒓𝒓𝒆𝒅 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔)/(𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒔𝒉𝒂𝒓𝒆𝒔 + 𝑫𝒊𝒍𝒖𝒕𝒆𝒅 𝒔𝒉𝒂𝒓𝒆𝒔)
g. Return on Stockholders’ Equity
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑷𝒓𝒆𝒇𝒆𝒓𝒓𝒆𝒅 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑬𝒒𝒖𝒊𝒕𝒚 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒎𝒎𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚

𝟗𝟔𝟎𝟎 − 𝟔𝟎𝟎
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑬𝒒𝒖𝒊𝒕𝒚 =
𝟒𝟓𝟎𝟎𝟎

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑬𝒒𝒖𝒊𝒕𝒚 = 𝟎. 𝟐𝟎

h. Return on Total Assets

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝟗𝟔𝟎𝟎
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 =
(𝟐𝟎𝟎𝟎𝟎𝟎 + 𝟐𝟐𝟎𝟎𝟎𝟎)/ 𝟐

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝟎. 𝟎𝟓