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Financial Ratio Cheatsheet Myaccountingcourse.Com Financial Ratio Cheatsheet MyAccountingCourse.com PDFPDF Table of contents Liquidity Ratios 3 Solvency Ratios 8 Efficiency Ratios 12 Profitability Ratios 17 Market Prospect Ratios 23 Coverage Ratios 28 CPA Exam Ratios to Know 31 CMA Exam Ratios to Know 32 Thanks for signing up for the MyAccountingcourse.com newletter. This is a quick financial ratio cheatsheet with short explanations, formulas, and analyzes of some of the most common financial ratios. Check out www.myaccountingcourse.com/financial-ratios/ for more ratios, examples, and explanations. Liquidity Ratios Quick Ratio / Acid Test Ratio Current Ratio Working Capital Ratio Times Interest Earned Find more Liquidity Ratios on the myaccountingcourse.com financial ratios page. Copyright © MyAccountingCourse.com | For personal use by the original purchaser only - financial ratio cheatsheet - page 3 Quick Ratio Explanation -The quick ratio or acid test ratio is a liquid- -The quick ratio is often called the acid ity ratio that measures the ability of a com- test ratio in reference to the historical use pany to pay its current liabilities when they of acid to test metals for gold by the early come due with only quick assets. Quick miners. If the metal passed the acid test, it assets are current assets that can be con- was pure gold. If metal failed the acid test verted to cash within 90 days or in the by corroding from the acid, it was a base short-term. Cash, cash equivalents, short- metal and of no value. term investments or marketable securities, and current accounts receivable are con- The acid test of finance shows how well sidered quick assets. a company can quickly convert its assets into cash in order to pay off its current li- abilities. It also shows the level of quick as- sets to current liabilities. Formula Analysis -The acid test ratio measures the liquidity -Higher quick ratios are more favorable of a company by showing its ability to pay for companies because it shows there are off its current liabilities with quick assets. If more quick assets than current liabilities. A a firm has enough quick assets to cover its company with a quick ratio of 1 indicates total current liabilities, the firm will be able that quick assets equal current assets. This to pay off its obligations without having to also shows that the company could pay sell off any long-term or capital assets. off its current liabilities without selling any long-term assets. An acid ratio of 2 shows Since most businesses use their long-term that the company has twice as many assets to generate revenues, selling off quick assets than current liabilities. these capital assets will not only hurt the company it will also show investors that current operations aren’t making enough profits to pay off current liabilities. Check out more examples www.myaccountingcourse.com/financial-ratios/quick-ratio Copyright © MyAccountingCourse.com | For personal use by the original purchaser only - financial ratio cheatsheet - page 4 Current Ratio Explanation -The current ratio is a liquidity and efficien- be converted into cash in the short term. cy ratio that measures a firm’s ability to This means that companies with larger pay off its short-term liabilities with its cur- amounts of current assets will more easily rent assets. The current ratio is an impor- be able to pay off current liabilities when tant measure of liquidity because short- they become due without having to sell term liabilities are due within the next year. off long-term, revenue generating assets. This means that a company has a limited amount of time in order to raise the funds to pay for these liabilities. Current assets like cash, cash equivalents, and market- able securities can easily Formula Analysis -The current ratio helps investors and credi- -If a company has to sell of fixed assets tors understand the liquidity of a company to pay for its current liabilities, this usually and how easily that company will be able means the company isn’t making enough to pay off its current liabilities. This ratio ex- from operations to support activities. In presses a firm’s current debt in terms of other words, the company is losing money. current assets. So a current ratio of 4 would Sometimes this is the result of poor collec- mean that the company has 4 times more tions of accounts receivable. current assets than current liabilities. The current ratio also sheds light on the A higher current ratio is always more favor- overall debt burden of the company. If a able than a lower current ratio because it company is weighted down with a current shows the company can more easily make debt, its cash flow will suffer. current debt payments. Check out more examples www.myaccountingcourse.com/financial-ratios/current-ratio Copyright © MyAccountingCourse.com | For personal use by the original purchaser only - financial ratio cheatsheet - page 5 Working Capital Ratio Explanation -The working capital ratio, also called the The faster the assets can be converted current ratio, is a liquidity ratio that mea- into cash, the more likely the company will sures a firm’s ability to pay off its current have the cash in time to pay its debts. liabilities with current assets. The working capital ratio is important to creditors be- The reason this ratio is called the working cause it shows the liquidity of the capital ratio comes from the working capi- company. tal calculation. When current assets exceed current liabilities, the firm has Current liabilities are best paid with cur- enough capital to run its day-to-day op- rent assets like cash, cash equivalents, erations. In other words, it has even capital and marketable securities because these to work. The working capital ratio trans- assets can be converted into cash much forms the working capital calculation into quicker than fixed assets. a comparison between current assets and current liabilities. Formula Analysis -Since the working capital ratio measures A ratio less than 1 is considered risky by current assets as a percentage of current creditors and investors because it shows liabilities, it would only make sense that a the company isn’t running efficiently and higher ratio is more favorable. A WCR of 1 can’t cover its current debt properly. A ra- indicates the current assets equal current tio less than 1 is always a bad thing and liabilities. A ratio of 1 is usually considered is often referred to as negative working the middle ground. It’s not risky, but it is capital. also not very safe. This means that the firm would have to sell all of its current assets in On the other hand, a ratio above 1 shows order to pay off its current liabilities. outsiders that the company can pay all of its current liabilities and still have current assets left over or positive working capital. Check out more examples www.myaccountingcourse.com/financial-ratios/working-capital-ratio Copyright © MyAccountingCourse.com | For personal use by the original purchaser only - financial ratio cheatsheet - page 6 Times Interest Earned Ratio Explanation -The times interest earned ratio, sometimes Since these interest payments are usually called the interest coverage ratio, is a cov- made on a long-term basis, they are often erage ratio that measures the proportion- treated as an ongoing, fixed expense. As ate amount of income that can be used with most fixed expenses, if the company to cover interest expenses in the future. can’t make the payments, it could go bankrupt and cease to exist. Thus, this ratio In some respects the times interest ratio could be considered a solvency ratio. is considered a solvency ratio because it measures a firm’s ability to make interest and debt service payments. Formula Analysis -The times interest ratio is stated in num- As you can see, creditors would favor a bers as opposed to a percentage. The ra- company with a much higher times inter- tio indicates how many times a company est ratio because it shows the company could pay the interest with its before tax can afford to pay its interest payments income, so obviously the larger ratios are when they come due. Higher ratios are less considered more favorable than smaller risky while lower ratios indicate credit risk. ratios. In other words, a ratio of 4 means that a company makes enough income to pay for its total interest expense 4 times over. Said another way, this company’s income is 4 times higher than its interest expense for the year. Check out more examples www.myaccountingcourse.com/financial-ratios/times-interest-earned-ratio Copyright © MyAccountingCourse.com | For personal use by the original purchaser only - financial ratio cheatsheet - page 7 Solvency Ratios Debt to Equity Ratio Equity Ratio Debt Ratio Find more Solvency Ratios on the myaccountingcourse.com financial ratios page. Copyright © MyAccountingCourse.com | For personal use by the original purchaser only - financial ratio cheatsheet - page 8 Debt to Equity Ratio Explanation -The debt to equity ratio is a financial, li- - Each industry has different debt to equity quidity ratio that compares a company’s ratio benchmarks, as some industries tend total debt to total equity. The debt to eq- to use more debt financing than others. A uity ratio shows the percentage of com- debt ratio of .5 means that there are half pany financing that comes from creditors as many liabilities than there is equity. In and investors. A higher debt to equity ra- other words, the assets of the company tio indicates that more creditor financing are funded 2-to-1 by investors to creditors. (bank loans) is used than investor financ- This means that investors own 66.6 cents of ing (shareholders).
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