Ratio Equations

Question 1

Asset Turnover

Answer 1

Net sales / Average total assets

Question 2

Working Capital

Answer 2

Current assets - Current liabilities

Question 3

Current Ratio

Answer 3

Current assets / Current liabilities

Question 4

Debt to Asset

Answer 4

Total liability / Total assets

Question 5

Times Interest Earned

Answer 5

(Net earning + Interest expense + Income tax expense) / Interest Expense

Question 6

Profit Margin

Answer 6

Net income / Net sales

Question 7

Leverage

Answer 7

Average total assets / Average shareholder’s equity

Question 8

Return on Equity

Answer 8

Net income / Average shareholder’s equity

Profit margin x Asset turnover x Leverage

Question 9

Average Shareholder’s Equity

Answer 9

(Beginning equity + Ending equity) / 2

Question 10

Price-Earnings (P/E) Ratio

Answer 10

Market price per share / Earnings per share

Question 11

Gross Profit Margin

Answer 11

Gross profit / Sales

Gross profit = Revenue - Cost of goods sold

Question 12

(Dividends) Payout Ratio

Answer 12

Cash dividends declared / Net income

Question 13

Current Ratio

Answer 13

Current asset / Current liabilities

Question 14

Quick Ratio

Answer 14

Highly liquid current assets / Current liabilities

Question 15

Accounts Receivable Turnover

Answer 15

Net credit sales / Average net accounts receivable

Net credit sales = Net sales - Cash sales
Net sales = Gross sales - Sales returns - Sales allowances
(most companies just report net sales as one item)

Question 16

Average Collection Period

Answer 16

365 / Accounts receivable turnover

Question 17

Inventory Turnover

Answer 17

Cost of goods sold / Average inventory

Question 18

Days in Inventory

Answer 18

365 / Inventory turnover

Question 19

Times Interest Earned

Answer 19

(Net income + Interest expense + Income tax expense) / Interest expense

Question 20

Debt to Equity Ratio

Answer 20

Average total liabilities / Average total equity

Question 21

Debt to Assets Ratio

Answer 21

Total liabilities / Total assets

Question 22

Horizontal Analysis Method (Percentage Increase/Decrease)

Answer 22

Ex. (New sales # - Old sales #) / Old sales #

Question 23

Return on Assets

Answer 23

Net income / Average total assets

Question 24

Earnings Per Share

Answer 24

(Net income - Preferred dividends) / Average number of outstanding shares

Question 25

Dividend Yield

Answer 25

Dividends declared per share / Market price per share