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Created page with "==Ratios== ===Profitability ratios=== Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return :;Gr..."

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==Ratios==

===Profitability ratios===
Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return
:;[[Gross margin]], '''Gross profit margin''' or '''Gross Profit Rate'''<ref>Williams, P. 265.</ref><ref name="Williams, p. 1094">Williams, p. 1094.</ref>

:::<math>\frac{\mbox{Gross Profit}}{\mbox{Net Sales}}</math> :::'''OR''' :::<math>\frac{\mbox{Net Sales -- COGS}}{\mbox{Net Sales}}</math>

----</hr>

:;[[Operating margin]], '''Operating Income Margin''', '''Operating profit margin''' or '''Return on sales''' (ROS)<ref name="Williams, p. 1094"/><ref>{{Cite book|last=Williams |first=Jan R. |author2=Susan F. Haka |author3=Mark S. Bettner |author4=Joseph V. Carcello |title=Financial & Managerial Accounting |publisher=McGraw-Hill Irwin |year=2008 |pages= 266 |isbn=978-0-07-299650-0}}</ref>
:::<math>\frac{\mbox{Operating Income}}{\mbox{Net Sales}}</math>
:Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.<ref>[http://www.investorwords.com/3460/operating_income.html Operating income definition]</ref> This is true if the firm has no non-operating income. ([[Earnings before interest and taxes]] / Sales<ref>Groppelli, p. 443.</ref><ref>{{Cite book|last = Bodie |first = Zane |author2=Alex Kane |author3=Alan J. Marcus |title = Essentials of Investments, 5th ed |publisher = McGraw-Hill Irwin |year = 2004 |pages =459 |isbn = 0-07-251077-3 }}</ref>)
----</hr>

:;[[Profit margin]], '''net margin''' or '''net profit margin'''<ref name="Groppelli, p. 444">Groppelli, p. 444.</ref>
:::<math>\frac{\mbox{Net Profit}}{\mbox{Net Sales}}</math>
----</hr>
:;[[Return on equity]] (ROE)<ref name="Groppelli, p. 444"/>
:::<math>\frac{\mbox{Net Income}}{\mbox{Average Shareholders Equity}}</math>
----</hr>
:;[[Return on assets]] (ROA ratio or [[Du Pont Ratio]])<ref name="Groppelli, p. 445"/>
:::<math>\frac{\mbox{Net Income}}{\mbox{Average Total Assets}}</math>
----</hr>
:;[[Return on assets]] (ROA)<ref>[http://www.college-cram.com/study/finance/ratios-of-profitability/return-on-assets/ Professor Cram. "Ratios of Profitability: Return on Assets"] College-Cram.com. 14 May 2008</ref>
:::<math>\frac{\mbox{Net Income}}{\mbox{Total Assets}}</math>
----</hr>
:;[[Return on assets Du Pont]] (ROA Du Pont)<ref>[http://www.college-cram.com/study/finance/ratios-of-profitability/return-on-assets-du-pont/ Professor Cram. "Ratios of Profitability: Return on Assets Du Pont"], College-Cram.com. 14 May 2008</ref>
:::<math>\left(\frac{\mbox{Net Income}}{\mbox{Net Sales}}\right)\left(\frac{\mbox{Net Sales}}{\mbox{Total Assets}}\right)</math>
----</hr>
:;[[Return on Equity Du Pont]] (ROE Du Pont)
:::<math>\left(\frac{\mbox{Net Income}}{\mbox{Net Sales}}\right)\left(\frac{\mbox{Net Sales}}{\mbox{Average Assets}}\right)\left(\frac{\mbox{Average Assets}}{\mbox{Average Equity}}\right)</math>
----</hr>
:;[[Return on net assets]] (RONA)
:::<math>\frac{\mbox{Net Income}}{\mbox{Fixed Assets + Working Capital}}</math>
----</hr>
:;[[Return on capital]] (ROC)
:::<math>\frac{\mbox{EBIT(1 − Tax Rate)}}{\mbox{Invested Capital}}</math>
----</hr>
:;[[Risk adjusted return on capital]] (RAROC)
:::<math>\frac{\mbox{Expected Return}}{\mbox{Economic Capital}}</math> :::'''OR''' :::<math>\frac{\mbox{Expected Return}}{\mbox{Value at Risk}}</math>
----</hr>
:;[[Return on capital employed]] (ROCE)
:::<math>\frac{\mbox{EBIT}}{\mbox{Capital Employed}}</math>
:::Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity
----</hr>
:;[[Cash flow return on investment]] (CFROI)
:::<math>\frac{\mbox{Cash Flow}}{\mbox{Market Recapitalisation}}</math>
----</hr>
:;[[Efficiency ratio]]
:::<math>\frac{\mbox{Non-Interest expense}}{\mbox{Revenue}}</math>
----</hr>
:;[[Net gearing]]
:::<math>\frac{\mbox{Net debt}}{\mbox{Equity}}</math>
----</hr>
:;[[Basic Earnings Power Ratio]]<ref>{{Cite book| last = Weston | first = J. | title = Essentials of Managerial Finance | publisher = Dryden Press | location = Hinsdale | year = 1990 | isbn = 0-03-030733-3 | page = 295}}</ref>
:::<math>\frac{\mbox{EBIT}}{\mbox{Total Assets}}</math>
----</hr>
----</hr>

===Liquidity ratios===

[[Accounting liquidity|Liquidity]] ratios measure the availability of cash to pay debt.

:;[[Current ratio|Current ratio (Working Capital Ratio)]]<ref name="Groppelli, p. 435">Groppelli, p. 435.</ref>
:::<math>\frac{\mbox{Current Assets}}{\mbox{Current Liabilities}}</math><hr></hr>
:;[[Quick ratio|Acid-test ratio (Quick ratio)]]<ref name="Groppelli, p. 435"/>
:::<math>\frac{\mbox{Current Assets -- (Inventories + Prepayments)}}{\mbox{Current Liabilities}}</math>
----</hr>
:;[[Cash ratio]]<ref name="Groppelli, p. 435"/>
:::<math>\frac{\mbox{Cash and Marketable Securities}}{\mbox{Current Liabilities}}</math>
----</hr>
:;[[Operating cash flow]] ratio
:::<math>\frac{\mbox{Operating Cash Flow}}{\mbox{Total Debts}}</math>
----</hr>

=== Activity ratios (Efficiency Ratios) ===
Activity ratios measure the effectiveness of the firm's use of resources.
:;[[Debtor collection period|Average collection period]]<ref name="Groppelli, p. 436"/>
:::<math>\frac{\mbox{Accounts Receivable}}{\mbox{Annual Credit Sales ÷ 365 Days}}</math>

:;[[Operating leverage#DOL and Operating income|Degree of Operating Leverage]] (DOL)
:::<math>\frac{\mbox{Percent Change in Net Operating Income}}{\mbox{Percent Change in Sales}}</math>

:;[[DSO Ratio]].<ref>{{cite book |author=Houston, Joel F.; Brigham, Eugene F. |title=Fundamentals of Financial Management|publisher=South-Western College Pub |location=[Cincinnati, Ohio] |year=2009 |page=90 |isbn=0-324-59771-1}}</ref>
:::<math>\frac{\mbox{Accounts Receivable}}{\mbox{Total Annual Sales ÷ 365 Days}}</math>

:;[[Average payment period]]<ref name="Groppelli, p. 436"/>
:::<math>\frac{\mbox{Accounts Payable}}{\mbox{Annual Credit Purchases ÷ 365 Days}}</math>

:;[[Asset turnover]]<ref>Bodie, p. 459.</ref>
:::<math>\frac{\mbox{Net Sales}}{\mbox{Total Assets}}</math>

:;[[Stock turnover]] ratio<ref>Groppelli, p. 438.</ref><ref>Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). ''Accounting Principles'' (4th ed.). New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 801-802.</ref>
:::<math>\frac{\mbox{Cost of Goods Sold}}{\mbox{Average Inventory}}</math>

:;[[Receivables Turnover Ratio]]<ref>Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). ''Accounting Principles'' (4th ed.). New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 800.</ref>
:::<math>\frac{\mbox{Net Credit Sales}}{\mbox{Average Net Receivables}}</math>

:;[[Inventory conversion]] ratio<ref name="Groppelli, p. 439"/>
:::<math>\frac{\mbox{365 Days}}{\mbox{Inventory Turnover}}</math>

:;Inventory conversion period (essentially same thing as above)
:::<math>\left (\frac{\mbox{Inventory}}{\mbox{Cost of Goods Sold}}\right)\mbox{365 Days}</math>

:;Receivables conversion period
:::<math>\left (\frac{\mbox{Receivables}}{\mbox{Net Sales}}\right)\mbox{365 Days}</math>

:;Payables conversion period
:::<math>\left (\frac{\mbox{Accounts Payables}}{\mbox{Purchases}}\right)\mbox{365 Days}</math>
:;[[Cash conversion cycle|Cash Conversion Cycle]]
:::<math>\mbox{Inventory Conversion Period + Receivables Conversion Period - Payables Conversion Period}</math>

===Debt ratios (leveraging ratios)===
Debt ratios quantify the firm's ability to repay long-term debt. Debt ratios measure [[leverage (finance)|financial leverage]].
:;[[Debt ratio]]<ref>Groppelli, p. 440; Williams, p. 640.</ref>
:::<math>\frac{\mbox{Total Liabilities}}{\mbox{Total Assets}}</math>

:;[[Debt to equity ratio]]<ref name="Groppelli, p. 441">Groppelli, p. 441.</ref>
:::<math>\frac{\mbox{Long-term Debt + Value of Leases}}{\mbox{Average Shareholders Equity}}</math>

:;[[Long-term Debt to equity]] (LT Debt to Equity)<ref name="Groppelli, p. 441"/>
:::<math>\frac{\mbox{Long-term Debt}}{\mbox{Average Shareholders Equity}}</math>

:;[[Times interest earned|Times interest earned ratio (Interest Coverage Ratio)]]<ref name="Groppelli, p. 441"/>
:::<math>\frac{\mbox{EBIT}}{\mbox{Annual Interest Expense}}</math>
:::'''OR'''
:::<math>\frac{\mbox{Net Income}}{\mbox{Annual Interest Expense}}</math>

:;[[Debt service coverage ratio]]
:::<math>\frac{\mbox{Net Operating Income}}{\mbox{Total Debt Service}}</math>

===Market ratios===
Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.
These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.
:;[[Earnings per share]] (EPS)<ref name="Groppelli, p. 446"/>
:::<math>\frac{\mbox{Net Earnings}}{\mbox{Number of Shares}}</math>

:;[[Payout ratio]]<ref name="Groppelli, p. 446">Groppelli, p. 446.</ref><ref>Groppelli, p. 449.</ref>
:::<math>\frac{\mbox{Dividends}}{\mbox{Earnings}}</math>
:::'''OR'''
:::<math>\frac{\mbox{Dividends}}{\mbox{EPS}}</math>

:;[[Dividend cover]] (the inverse of Payout Ratio)
:::<math>\frac{\mbox{Earnings per Share}}{\mbox{Dividend per Share}}</math>

:;[[PE ratio|P/E ratio]]
:::<math>\frac{\mbox{Market Price per Share}}{\mbox{Diluted EPS}}</math>

:;[[Dividend yield]]
:::<math>\frac{\mbox{Dividend}}{\mbox{Current Market Price}}</math>

:;Cash flow ratio or [[Price/cash flow ratio]]<ref name="Groppelli, p. 447">Groppelli, p. 447.</ref>
:::<math>\frac{\mbox{Market Price per Share}}{\mbox{Present Value of Cash Flow per Share}}</math>

:;[[P/B ratio|Price to book value ratio]] (P/B or PBV)<ref name="Groppelli, p. 447"/>
:::<math>\frac{\mbox{Market Price per Share}}{\mbox{Balance Sheet Price per Share}}</math>

:;[[Price/sales ratio]]
:::<math>\frac{\mbox{Market Price per Share}}{\mbox{Gross Sales}}</math>

:;[[PEG ratio]]
:::<math>\frac{\mbox{Price per Earnings}}{\mbox{Annual EPS Growth}}</math>

Other Market Ratios
:;[[EV/EBITDA]]
:::<math>\frac{\mbox{Enterprise Value}}{\mbox{EBITDA}}</math>

:;[[EV/Sales]]
:::<math>\frac{\mbox{Enterprise Value}}{\mbox{Net Sales}}</math>

:;[[Cost/Income ratio]]

Sector-specific ratios
:;[[EV/capacity]]

:;[[EV/output]]

===Capital budgeting ratios===
{{Main|Capital budgeting}}
In addition to assisting management and owners in diagnosing the financial health of their company, ratios can also help managers make decisions about investments or projects that the company is considering to take, such as acquisitions, or expansion.

Many formal methods are used in capital budgeting, including the techniques such as
* [[Net present value]]
* [[Profitability index]]
* [[Internal rate of return]]
* [[Modified internal rate of return]]
* [[Equivalent annual cost|Equivalent annuity]]

Mathematic Expression - Revision history

Nicolas Rollin: Created page with "==Ratios== ===Profitability ratios=== Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return :;Gr..."