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Financial Ratios  Leverage LAMP
Leverage Ratios
Debt Ratio 
Debt Ratio = Total Debt / Total Assets 
measures the relative amount of company's assets that are financed by Debt 
High Debt Ratio = Higher financial risk 

Debt Equity Ratio 
D/E Ratio = Total Debt / Total Common Equity 
ratio of firm's total liabilities to Equity Capital 
High D/E Ratio indicates higher risk to the shareholders 

Equity Multiplier 
Equity Multiplier = Total Assets / Total Common Equity 
extent to which firm's assets are greater than the shareholder's equity 
If EM is 5, it means investment in total assets is 5 times the investment by Equity Shareholders 

Market Debt Ratio 
Market Debt Ratio = Total Debt / (Total Debt + Market Value of Equity) 
ratio between the market value of debt to the market value of debt and equity 

Liabilities to Assets Ratio 
LAR = Total Liabilities / Total Assets 
show the share of total liabilities out of total assets 

Interest Coverage Ratio 
ICR = Operating Income / Interest Expenses 
shows how easily a firm can pay its interest expenses 

Debt Service Coverage Ratio 
DSCR = Operating Income / Total Debt Service 
reveals how easily a firm can pay its debt obligations 

Leverage Ratios or Debt Management Ratios indicate the extent to which debt financing is used by a firm. These ratios measure longterm solvency of a firm.
Liquidity Ratios
Current Ratio 
Current Ratio = Current Assets / Current Liabilities 
ratio of current assets and current liabilities. It measures the liquidity stand of a firm 
Ideal ratio is 2:1 or more. A low CR, say 0.5:1, means company has Rs.50 for every Rs.100 of debt and can't cover it shortterm debts 

Quick Ratio 
Quick Ratio = Quick Assets / Current Liabilities 
also know as Acid Test Ratio 
Quick Ratio = (Current Assets  Inventories) / Current Liabilities 
a measure of shortterm solvency of a firm 
Reliable because assets forming part of quick assets are easily convertible into cash in short notice. Quick ratio of 1:1 represents satisfactory financial situation 

Cash Ratio 
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities 
measures a firm's ability to pay off its shortterm liabilities with cash and cash equivalents 

Operating Cash Flow Ratio 
OCFR = Operating Cash Flow / Current Liabilities 
measure of the number of times a firm can pay off its current liabilities with the cash generated in a given period 
Liquidity Ratios are used to assess the shortterm solvency position of a firm i.e. firm's ability to pay short term obligations out of current/liquid assets.


Assets Management (Performance) Ratios
Inventory Turnover Ratio 
ITR = Cost of Goods Sold / Inventory 
measures how firm's investment in inventory is being used to generate sales 
shows how rapidly inventory is turning into receivables through sales 

Days Sales Outstanding 
DSO = (Receivables x No. of days) / Total Credit Sales 
used to evaluate a firm's ability to collect its sales in timely manner 
It is a measure of quality of debtors as It shows the average length of time that a firm takes to realize in cash after credit sales has been made 

Receivables Turnover Ratio 
RTOR = Annual Credit Sales / Accounts Receivables 
indicates the no. of times the firm collects its account receivables during a year 
Higher RTOR, higher the efficiency of management assets 

Fixed Assets Turnover Ratio 
FATOR = Sales / Net Fixed Assets 
measures the effectiveness of a firm's ability to make efficient utilization of fixed assets 
High FATOR indicates efficient utilization of fixed assets in sales generation 

Total Assets Turnover Ratio 
TATOR = Sales / Total Assets 
measure of a firm's ability to make effective utilization of its total investment of generating sales revenue 
High TATOR indicates efficient utilization of total assets in sales generation 
Assets Management Ratios measure the effectiveness of a firm's asset utilization. Also Called Turnover Ratios or Efficiency or Performance Ratios because they indicate the speed with which assets are being converted into sales
Market Values Ratios
Price Earnings Ratio 
PE Ratio = Market Price (per Share) / Earnings (per Share) 
Ratio of company's stock price to the earnings per share 
can only be calculated for listed companies. Higher PE ratio = higher growth rate of the firm 

Market to Book Value Ratio 
MBVR = Market Value (per Share) / Book Value (per Share) 
comparison of market value with book value of a firm 
IF MTBR<1, undervaluation; IF MTBR > 1, overvaluation; 

Dividends Per Share 
DPS = Total Dividends / No. of Shares 
total dividends shared per unit share 
Higher DPS = much profitable for shareholders 

Dividends Payout Ratio 
Payout Ratio = Dividends (per Share) / Earnings (per Share) 
the amount of divident that a company gives out to its shareholders out to its current earnings 

Dividend Yield Ratio 
DYR = Dividend (per Share) / Share Price 
measures the amount of dividends attributed to shareholders relative to the market value per share 

Market Values Ratios represent the ratios that relate the firm's stock price to its earnings and Stock Value per Share


Profitability Ratios
Net Profit Margin 
NPM = Net Income / Sales 
measures net income per Rupee of sales; it measures the operating efficiency 

Gross Profit Margin 
GPM = Gross Profit / Sales 
compares the gross profit to its net sales to show how much profit it makes after paying the cost of goods sold 
GPM = (Sales  Cost of goods sold) / Sales 
High GPM is a sign of good management efficiency to produce goods and services at low cost 

Earning Power Ratio 
EPR = Operating Profit / Total Assets 

Return on Assets 
RoA = Net Income / Total Assets 

Return on Equity 
RoE = Net Income / Total Equity 

Profitability Ratios measure the operating efficiency of a firm

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