"Ratio Analysis" Terms

Ratio Analysis

The acid-test ratio is a measure of how well a company can meet its short-term financial liabilities.
Also known as the quick ratio, the acid-test ratio can be calculated as follows:
Acid-Test Ra...

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 reven...

Actual return refers to the nominal return made on an investment during a given period.
The actual return on an investment is the actual amount of money gained or lost during a period of time (e.g...

The arithmetic mean is the average of a series of numbers.
The formula for calculating the arithmetic mean is:
Arithmetic mean = (X1 + X2 + X3 + ... +XN) / N
where X1, X2, X3, XN are the values of t...

The arithmetic mean average is the average of a series of numbers.
The formula for calculating the arithmetic mean average is:
Arithmetic mean average = (X1 + X2 + X3 + ... +XN) / N
where X1, X2, X3...

The asset turnover ratio is a measure of how efficiently a company's assets generate revenue. It measures the number of dollars of revenue generated by one dollar of the company's assets.
The form...

Banks use the back-end ratio to determine whether a mortgage applicant is a good credit risk. The formula for the back-end ratio, generally, is: Back-End Ratio = (All monthly loan payments + reques...

A bank efficiency ratio is a measure of a bank's overhead as a percentage of its revenue.
The formula varies, but the most common one is:
Bank Efficiency Ratio = Expenses* / Revenue
*not including i...

A company's book-to-bill ratio measures the company's number of outstanding orders as compared with the number of shipped or fulfilled orders. The book-to-bill ratio is a valuable tool for measuring ...

Compound Annual Growth Rate (or CAGR) is a widely used measure of growth. It is used to evaluate anything that can fluctuate in value, such as assets and investments. CAGR takes the initial investmen...

The cash flow return on investment (CFROI) measures a company's cash return on invested assets. It is determined by dividing a company's gross cash flow by its gross investment.
A company invests in...

Cash flow to capital expenditures is the ratio of a company's cash from operations to its capital expenditures for acquiring or upgrading assets, such as buildings or equipment, required to improve o...

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 rati...

The current ratio is the ratio of current assets to current liabilities.
The current ratio is a commonly used liquidity ratio that measures a company's ability to pay its current liabilities with it...

A debt ratio is simply a company's total debt divided by its total assets.
Debt Ratio = Total Debt / Total Assets
For example, if Company XYZ had $10 million of debt on its balance sheet and $15 ...

A company's debt service coverage ratio (DSCR) refers to its ability to meet periodic obligations on outstanding liabilities with respect to its net operating revenue.
The debt service coverage rat...

The debt-to-equity ratio (D/E) is an essential formula in corporate finance. It’s used to measure leverage (or the amount of debt a company has) compared to its shareholder equity.
All companies h...

DuPont analysis examines the return on equity (ROE) analyzing profit margin, total asset turnover, and financial leverage. It was created by the DuPont Corporation in the 1920s.
The DuPont analysis ...

The DuPont identity breaks down return on equity (ROE) into its components -- profit margin, total asset turnover, and financial leverage -- so that each one can be examined in depth.
The DuPont ide...

The earnings yield is the ratio of a company's last twelve months (LTM) of earnings per share (EPS) to its stock price. It is the inverse of the price-to-earnings (P/E) ratio.
The formula for earnin...

An efficiency ratio is a measure of a bank's overhead as a percentage of its revenue.
The formula varies, but the most common one is:
Efficiency Ratio = Expenses* / Revenue
*not including interest e...

The equity multiplier is a ratio used to determine the financial leverage of a company.
The formula for the equity multiplier is:
Equity Multiplier = Total Assets / Total Stockholders' Equity
If c...

Free asset ratio refers to the net assets of an insurance company as a percentage of its total assets. Free assets are the same as net assets, that is, assets that are not obligated to insurance po...

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...

Gross profit margin is a measure of a company’s profitability, calculated as the gross profit as a percentage of revenue. Gross profit is the amount remaining after deducting the cost of goods sold...

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 t...

Joint probability is the likelihood of more than one event occurring at the same time.
he joint probability for two events, A and B, is expressed mathematically as P(A,B). Joint probability is calcu...

A key ratio is any financial ratio that is especially important, prevalent, or necessary in analyzing a company's performance in relation to other companies, the industry or the market.
Key ratios c...

A multiple is a relative valuation metric used to estimate the value of a stock.
Let's look at an example to illustrate the concept.
Assume that Big Store's stock is trading at $14 and the company's...

Net interest margin is the ratio of net interest income to invested assets.
Net interest margin is also known as "net yield on interest-earning assets."
The formula for net interest margin is:
N...

The null hypothesis (H0) suggests that there is no statistical significance in a given set of observations. This implies that any kind of deviation or importance you see in a data set is only the res...

The operating cash flow ratio is cash from operating activities as a percentage of current liabilities in a given period.
Operating cash flow ratio is generally calculated using the following for...

The operating expense ratio (OER) is equal to a company's operating expenses divided by its revenues. The measure is very common in real estate analysis, whereby analysts are measuring the costs to o...

Operating leverage is the ratio of a company's fixed costs to its variable costs.
Here is the formula for operating leverage:
Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / Q...

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 investmen...

The payout ratio, also known as the dividend payout ratio, is the percentage of a company's earnings paid out to investors as cash dividends.
At the end of a specified period, companies will somet...

A price multiple is a ratio that combines some measure of a company's performance and the company's stock price.
In general, a price multiple ratio looks like this: Price multiple = Price / Perform...

The price-earnings relative is a comparison of a stock's P/E ratio to the cumulative P/E ratio of a related market index.
The price-earnings relative considers the P/E of a given stock relative to t...

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.
Book value, usually loca...

The price-to-cash flow ratio (P/CF) is used to evaluate the price of a company's stock as compared to the amount of cash flow it generates.
The formula for the price-to-cash flow ratio is:
Price-to-...

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 s...

The price-to-free cash flow ratio (P/FCF) is a valuation method used to compare a company’s current share price to its per-share free cash flow.
The formula for the price-to-free cash flow ratio i...

The price-to-innovation-adjusted earnings ratio is used to evaluate the price of a company's stock as compared to its earnings when adjusted for the amount the company spends on R&D.
The formula...

The price-to-research ratio is used to evaluate the price of a company's stock as compared to its ability to generate future profits from new products.
The formula for the price-to-research ratio is...

The price-to-sales ratio helps determine a stock’s relative valuation. The formula to calculate the P/S ratio is:
P/S Ratio = Price Per Share / Annual Net Sales Per Share
Let's assume Company XYZ ...

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.
T...

The price/earnings-to-growth and dividend yield ratio (PEGY) demonstrates how much the market is willing to pay for earnings growth and dividend yield. By incorporating dividend yield, the PEGY ratio...

The PEG ratio is a derivative of the P/E ratio that takes into account future growth in earnings.
The formula for the PEG ratio is:
PEG Ratio = Price-to-Earnings (P/E) Ratio / Annual Earnings Per ...

The put/call ratio is a popular sentiment indicator based upon the trading volumes of put options compared to call options. The ratio attempts to gauge the prevailing level of bullishness or bearish...

A quartile is one of four equal parts.
For example, if we were to look at all of the closing prices for Company XYZ stock for every day in the last year, the top 25% of those prices would represent ...

The quick ratio (also known as the acid-test ratio) offers insight into how well a company can meet its short-term obligations. As in chemistry, an acid test provides fast results. The quick ratio sh...

A quintile is one of five equal parts.
For example, if we were to look at all of the closing prices for Company XYZ stock for every day in the last year, the top 20% of those prices would represent ...

Ratio analysis is the exercise of calculating various pieces of financial data in relation to one another.
There are dozens of financial ratios out there. In fact, there are too many to list here in...

Return on capital is a profitability ratio. It measures the return that an investment generates for capital contributors, i.e. bondholders and stockholders. Return on capital indicates how effective ...

Return on invested capital (ROIC) is a profitability ratio. It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us...

Return on total capital is a profitability ratio. It is a measure of the return an investment generates for those who contribute capital, i.e. bondholders and stockholders. Return on total capital ...

Revenue per available room, or RevPAR for short, is a ratio commonly used to measure financial performance in the hospitality industry. The metric, which is a function of both room rates and occupanc...

The term sales per share represents the portion of a company's revenue that is allocated to each share of common stock. The figure can be calculated simply by dividing sales earned in a given reporti...

The sales to cash flow ratio measures the level of a company's sales against its total cash flow.
Expressed on a per-share basis, the sales to cash flow ratio is calculated by dividing a company's s...

The Sharpe ratio is measure of risk. It is named after Stanford professor and Nobel laureate William F. Sharpe.
The Sharpe ratio is a ratio of return versus risk. The formula is:(Rp-Rf)/ ?p
where:
R...

A short interest ratio is the number of shares or units of a security that have been sold short and not yet covered or repurchased. It is typically expressed as a percentage of the average daily trad...

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 th...

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 expense...