Business Valuation – Me and Finance

This page lists the most important financial ratios when analyzing financial statements, namely the Balance Sheet, and Income Statement. Income Statement Ratios Gross Profit Ratio Gross Profit Ratio = Gross Profit / Total RevenueExpressed as percentage Show's the proportion of profits prior to SG&A. Operating Profit Ratio Operating Profit Ratio = Operating Income / Total RevenueExpressed as percentage Show's how much the company makes after paying for variable costs of production such as wages, raw materials, and others. Net Profit Ratio Net Profit Ratio = Net Income / Total RevenueExpressed as percentage Show's how much net profit is generated as a percentage of net revenue. Tax Ratio Tax Ratio = Income Tax / Income Before TaxExpressed as percentage Interest Coverage Ratio Interest Coverage Ratio = Interest Expense / Operating IncomeExpressed as number with one decimal SG&A Ratio SG&A Ratio = Selling/General/Administrative Expenses / Total RevenueExpressed as percentage R&D Ratio R&D Ratio = Research & Development / Total RevenueExpressed as percentage Dep. & Amort. Ratio Dep. & Amort = Depreciation/Amortization / Total RevenueExpressed as percentage Unusual Expenses Ratio Unusual Expense Ratio = Unusual Expenses (Income) / Total RevenueExpressed as percentage Other Ratio Other Ratio = Other Operating Expenses / Total RevenueExpressed as percentage Interest Ratio Interest Ratio = Interest Expense / Total RevenueExpressed as percentage Extraordinary Items Ratio Extraordinary Items Ratio = Extraordinary Items / Total RevenueExpressed as percentage Balance Sheet Ratios Quick Ratio (Acid Test Ratio) Quick Ratio = (Total Current Assets - Inventories) / Total Current LiabilitiesExpressed as number with one decimal A ratio to determine the short-term liquidity without calculating the inventories (as these might take time to sell, or can't be sold for the full value). A general good ratio is 1:1 but it depends on the industry. Current Ratio Current Ratio = Total Current Assets / Total Current LiabilitiesExpressed as number with one decimal A ratio to determine the short-term liquidity. It takes into account: Accounts receivableInventoryCashPrepaid expenses A general good ratio is 2:1 but it depends on the industry. Total Asset Turnover Ratio Total Asset Turnover Ratio = Total Revenue / Total Current AssetsExpressed as number with one decimal This ratio shows: How efficient the company is using it's assets to generate revenue.How much revenue does the company generate for each 1 dollar of assets? Net Asset Turnover Ratio Net Asset Turnover Ratio = Total Revenue / (Total Assets - Current Liabilities)Expressed as number with one decimal This ratio shows (without counting current liabilities, as paid off within a year): How efficient the company is using it's assets to generate revenue.How much revenue does the company generate for each 1 dollar of assets? Efficiency Ratios Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Revenue / InventoriesExpressed as number with one decimal Inventory Days Inventory Days = (Inventories * 365) / Cost of RevenueExpressed as number with one decimal Accounts Receivable Ratio Accounts Receivable Ratio = Total Revenue / Accounts ReceivableExpressed as number with one decimal Accounts Receivable Days Accounts Receivable Days = (Accounts Receivable * 365) / Total RevenueExpressed as number with one decimal Accounts Payable Ratio Accounts Payable Ratio = Cost of Revenue / Accounts payableExpressed as number with one decimal Accounts Payable Days Accounts Payable Days = (Accounts Payable * 365) / Cost of RevenueExpressed as number with one decimal PP&E Turnover Ratio PP&E Turnover Ratio = Total Revenue / Property, plant and equipmentExpressed as number with one decimal Working Capital Turnover Working Capital Turnover = Total Revenue / ((Accounts Receivable + Inventories) - Accounts Payable)Expressed as number with one decimal Cash Turnover Cash Turnover = Total Revenue / CashExpressed as number with one decimal Leverage & Solvency Ratios Debt to Equity Debt to Equity = Debt / Shareholder's EquityExpressed as a percentage If the ratio is higher than 100% then more funding comes from debt, rather than equity. Debt to Capital Debt to Capital = Debt / (Debt + Shareholder's Equity)Expressed as a percentage If the ratio is higher than 100% then more funding comes from debt, rather than equity. Debt to Tangible Net Worth Debt to Tangible Net Worth = Debt / (Shareholder's Equity - Goodwill and intangible assets)Expressed as a percentage A ratio of 1 would be best, but if it's greater than 1, then it is necessary to check how the company is managing its financing. Total Liabilities to Equity Total Liabilities to Equity = Total Liabilities / Shareholder's EquityExpressed as a percentage Determines together with the debt to equity ratio, the impact of the operational liabilities on the business. Total Assets to Equity Total Assets to Equity = Total Assets / Shareholder's EquityExpressed as a percentage If the ratio is low, the company might not be sufficiently leveraged. The higher the value, the higher leveraged, the company is. Debt to EBITDA Debt to EBITDA = Debt / (Operating Income + Depreciation/Amortization)Expressed as a percentage Assess the amount of leverage in relation to EBITDA. Depending on industry this can range from 1 to 5 times. Capital Structure Impact Capital Structure Impact = Income Before Tax / Operating IncomeExpressed as a percentage Acid Test Acid Test = (Total Current Assets - Inventories) / Total Current liabilitiesExpressed as a percentage Rates of Return Return on Equity Return on Equity = Net Income / Shareholder's EquityExpressed as a percentage Return on Assets Return on Assets = Net Income / Total AssetsExpressed as a percentage