Financial ratios loan and credit

Financial Ratios

LIQUIDITY

RATIO

CALCULATION

DEFINITION

Working Capital

Current Assets / Current Liabilities

It helps determine the amount of cushion that the company has. As in how much the current assets can decline in dollar value to cover current liabilities.

Quick Ratio

(Current Assets-Inventory) / Current Liabilities

Measures the coverage of current assets minus inventory over current liabilities.

Current Ratio

Current Assets / Current Liabilities

Measures the coverage of current assets over current liabilities.


PROFITABILITY

RATIO

CALCULATION

DEFINITION

Return on Assets (ROA)

Profit After Tax / Total Assets

Measures the effectiveness of management at making a profit and using the assets efficiently.

Return on Equity (ROE)

Profit After Tax / Net Worth

Measures profitability as a percentage of net worth.

Net Operating Profit Margin

Net Operating Profit / Net Sales

Measures profitability after Cost of Goods Sold and Operating expenses.

Gross Profit Margin

Gross Profit / Net Sales

Measures profitability accounting only for Cost of Goods Sold.


LEVERAGE AND COVERAGE

RATIO

CALCULATION

DEFINITION

Net Worth

Total Assets - Total Liabilities

This is the Owner's equity in the company.

Tangible Net Worth

Net Worth - Intangible Assets

This is the Owner's equity in the company adjusted by taking out intangible assets.

Debt to Worth

Total Liabilities / Net Worth

Very important ratio determines the relationship between leverage and equity. The lower the number the better.

Interest Coverage

Operating Profit / Interest Expense

Reflects the capability of the borrower to meet financing obligations. The higher the better.

EBIDA

Net Income + Interest Expense + Depreciation + Amortization.

Earnings before Interest, Depreciation and Amortization.


ACTIVITY

RATIO

CALCULATION

DEFINITION

Accounts Receivable Turnover Days

(Accounts Receivable / Sales) x 365

Number of days that it takes the company on average to collect its receivables

Inventory Turnover Days

(Inventory / Cost of Goods Sold) x 365

Number of days it takes the company on average to sell its inventory.

Accounts Payable Turnover Days

(Accounts Payable / Cost of Goods Sold) x 365

Number of days it takes the company on average to pay its payables.

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