Dictionary - Financial Ratios
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Acid Test Ratio

With our acid test ratio explanation, you’ll learn how to calculate and interpret this important financial ratio.   Read more

Activity Ratio

An activity ratio is a metric which determines the ability of a company to convert its balance sheet accounts into revenue. Activity ratios assess how effectively a company is able to generate revenue in the form of cash and sales based on its asset, liability and capital share accounts. Read more

Cash Flow Per Share

Cash flow per share represents the portion of a company's cash flow allocated to each share of common stock. Cash flow per share can be calculated by dividing cash flow earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term. Read more

Coverage Ratio

A coverage ratio divides a company's income or cash flow by a certain expense in order to determine financial solvency. Some of the most common coverage ratios include the fixed-charge coverage ratio, debt service coverage ratio, times interest earned (TIE), and the interest coverage ratio. Read more

Current Ratio

The current ratio is a commonly-used financial ratio.It tells investors and analysts whether a company is able to pay its current liabilities with its current assets (typically within a 12-month period).  To calculate current ratio, you’ll need the firm’s balance sheet and the following formula:  Let's look at the balance sheet for Company XYZ: We can calculate Company XYZ's current ratio as:  2,000 / 1,000 = 2.0 At the end of 2020, Company XYZ had $2.00 in current assets for every dollar of current liabilities. Read more

Days Sales Outstanding (DSO)

Days sales outstanding (DSO) is the ratio of receivables to the daily average of credit sales. The formula for daily sales oustanding is: DSO = Receivables / (Net Annual Sales on Credit / 360) If a company does not sell on credit (that is, the customer must pay immediately), then total sales is used in the denominator. Read more

Days Working Capital

Days working capital is the ratio of working capital to sales.The formula is: Days Working Capital = (Average Working Capital x 365)/Annual Sales Working capital is money available to a company for day-to-day operations. Read more

Diluted Earnings per Share

Diluted earnings per share is a measure of profit.The formula for diluted earnings per share is: Fully Diluted Earnings Per Share = (Net Income - Preferred Stock Dividends) / (Common Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Shares + Convertible Debt + Warrants) Let's assume Company XYZ had $10,000,000 of net income this year. Read more

Earnings Multiplier

The earnings multiplier, also called the price-to-earnings ratio (P/E), is a valuation method used to compare a company’s current share price to its per-share earnings. The market value per share is the current trading price for one share in a company, a relatively straightforward definition. Read more

Enterprise Value to Cash Flow from Operations (EV/CFO)

Enterprise value to cash flow from operations (EV/CFO) is the ratio of the entire economic value of a company to the cash it produces.The formula for EV/CFO is: EV/CFO = (Market Capitalization + Total Debt – Cash)/Cash from Operations Some analysts adjust the debt portion of the formula to include preferred stock; they may also adjust the cash portion of the formula to include current accounts receivable and liquid inventory. Read more

Forward Price-to-Earnings Ratio (Forward P/E)

The forward price-to-earnings ratio (forward P/E) is a valuation method used to compare a company’s current share price to its expected per-share earnings. The market value per share is the current trading price for one share in a company, a relatively straightforward definition. Read more

Goodwill-to-Assets Ratio

The goodwill-to-assets ratio describes the percentage of a firm's total assets that can be explained by the amount of goodwill on the balance sheet.  The formula for the goodwill-to-assets ratio is: Goodwill to Assets = Goodwill / Total Assets For example, let's assume Company XYZ has $5,000,000 of goodwill on its balance sheet.Its total assets are $20,000,000. Read more

Interest Coverage Ratio

The interest coverage ratio, also known as times interest earned, is a measure of how well a company can meet its interest-payment obligations. The interest coverage ratio is also referred to as the times interest earned ratio. Read more

Internal Rate of Return | IRR

Internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows (both positive and negative) equal to zero for a specific project or investment.  IRR may also be referred to as the discounted cash flow rate of return (DCFROR).  What Does IRR Tell You About a Project?The internal rate of return is used to evaluate projects or investments. Read more

Leverage Ratio

A leverage ratio is used to evaluate a company’s debt load in relation to its equity and assets.Investors use leverage ratios to understand how a company plans to meet its financial obligations and to determine how its debt is used to finance operations.  These types of financial ratios shouldn’t be used alone but alongside other metrics to determine a company’s overall economic health.  When the debt ratio is low (below 1.0), principal and interest payments don't command such a large portion of the company's cash flow. Read more

Margin

Margin can be defined in two main ways:  It is the ratio of profit divided by revenue.This financial ratio is used to determine a company’s profitability.  Money borrowed from a brokerage firm in order to leverage an investment. Read more

Net Assets

Net assets are what a company owns outright, minus what it owes.Put another way, net assets equal the company assets (economic resources) minus liabilities (what is owed to someone else). Read more

Net Current Asset Value Per Share (NCAVPS)

The net current asset value per share (NCAVPS) equals a company's current assets divided by its number of shares outstanding. The formula for NCAVPS is: NCAVPS = (Current Assets - Current Liabilities) / Shares Outstanding A current asset is cash or an asset that can be converted to cash within one year. Read more

Net Present Value of Growth Opportunities (NPVGO)

Net Present Value of Growth Opportunities (NPVGO) is the simply the present value of additional cash flows associated with an acquisition, net of the purchase price of the acquisition.Essentially, the concept adds the present value of assets in place to the present value of the company's growth prospects. Read more

Net Profit Margin

Net profit margin is a metric that indicates how well a company can transform its revenues into profits.Net profit margin is the percent of revenue remaining after all operating expenses, interest, taxes, and preferred stock dividends have been deducted from a company's gross or total revenue. Read more

Operating Expense Ratio (OER)

An operating expense ratio (also referred to as OER) is an extremely common real estate analysis.OER measures where analysts measure the costs to operate a piece of property versus the income it generates.  Operating expenses are costs associated with running a business's core operations on a daily basis. Read more

Operating Margin

Operating margin is a financial metric used to measure the profitability of a business.The operating margin shows what percentage of revenue is left over after paying for costs of goods sold and operating expenses (but before interest and taxes are deducted). Read more

Operating Ratio

Operating ratio is the ratio of operating expenses to net sales.Operating ratio is also a common term in the insurance business, where it refers to an issuer's profit from underwriting and investment activities. Read more

Plowback Ratio

The opposite of the dividend payout ratio, a company's plowback ratio is calculated as follows: Plowback ratio = 1 – (Annual Dividend Per Share / Earnings Per Share) Let's assume Company XYZ reported earnings per share of $5 last year and paid $1 in dividends.Using the formula above, Company XYZ's dividend payout ratio is: $1 / $5 = 20% Company XYZ distributed 20% of its income in dividends and reinvested the rest back into the company. Read more

Price-to-Book Ratio (P/B)

The price-to-book ratio measures a company's market price in relation to its book value.The ratio denotes how much equity investors are paying for each dollar in net assets. Read more

Price-to-Earnings Ratio (P/E)

The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current share price to its per-share earnings. The market value per share is the current trading price for one share in a company, a relatively straightforward definition. Read more

Price-to-Tangible Book Value Ratio

The price-to-tangible book value ratio measures a company's market price in relation to its tangible book value.The ratio denotes how much investors are paying for each dollar of physical assets. Read more

Receivables Turnover Ratio

The receivables turnover ratio is a company's sales made on credit as a percentage of average accounts receivable.The formula for receivables turnover ratio is: Receivables Turnover = Net Credit Sales/Average Accounts Receivable For example, let's assume that Company XYZ sells $10,000,000 of widget parts this year. Read more

Return on Assets (ROA)

Return on assets (ROA) is a financial ratio that can help analyze the profitability of a company.ROA measures the amount of profit a company generates as a percentage relative to its total assets.  Put another way, ROA answers the question of how much money is made (net income) from what a company owns (assets). Read more

Return on Capital (ROC)

Return on capital (ROC) is a ratio that measures how well a company turns capital (e.g.debt, equity) into profits. Read more

Return on Equity (ROE)

Return on equity (ROE) is a measurement of how effectively a business uses equity – or the money contributed by its stockholders and cumulative retained profits – to produce income.In other words, ROE indicates a company’s ability to turn equity capital into net profit.  You may also hear ROE referred to as “return on net assets.” A high ROE suggests that a company’s management team is more efficient when it comes to utilizing investment financing to grow their business (and is more likely to provide better returns to investors). Read more

Return on Net Assets (RONA)

Return on net assets is a metric which measures a company's financial performance with regard to fixed assets combined with working capital. Return on net assets (RONA) is calculated by dividing a company's net income in a given period by the total value of both its fixed assets and its working capital. Read more

Tangible Book Value Per Share (TBVPS)

Tangible book value per share (TBVPS) equals a company's net tangible assets divided by its number of shares outstanding.A tangible asset is anything that has commercial or exchange value and has a physical form. Read more

Texas Ratio

The Texas ratio was developed by RBC Capital Markets' banking analyst Gerard Cassidy as a way to predict bank failures during the state's 1980s recession.The ratio is still widely-used throughout the banking industry. Read more

Times Interest Earned

The times interest earned, also known as interest coverage ratio, is a measure of how well a company can meet its interest-payment obligations.The formula for times interest earned is: Earnings Before Interest and Taxes/ Interest Expense Here is some information about Company XYZ: Net Income    $350,000 Interest Expense    ($400,000) Taxes    ($50,000) Using the formula and the information above, we can calculate that XYZ’s times interest earned is: This means that XYZ Company is able to meet its interest payments two times over. Read more

Weighted Average Cost of Capital (WACC)

In investing terms, WACC shows the average rate that companies pay to finance their overall operations.WACC is calculated by incorporating equity investments from the sale of stock, as well as any operational debt they incur (with respect to the firm’s enterprise value).  WACC shows how much a company must earn on its existing assets to satisfy the interests of both its investors and debtors. Read more

Working Ratio

A company's working ratio measures its ability to cover its annual expenses. A company's working ratio indicates whether or not it is capable of at least breaking even by dividing its annual expenses by its annual revenues as shown: Working Ratio = Yearly Expenses – (Debt + Depreciation) / Yearly Gross Revenue A company with a ratio of 1 or less is capable of covering its expenses. Read more