The customizable Trial Balance>Financial Ratios screen provides a set of essential financial ratios that break your financial activity into simple mathematical comparisons for tracking year-to-year. By isolating these essential elements, you can easily identify any unusual activity that may require further analysis. You can designate thresholds for several ratios to alert the business to potential long-term concerns (for example, for the current ratio or working capital).
In addition to calculating ratios based on each period's balances, you can record the appropriate industry standard ratios for comparison. For lists of industry standard ratios, use a reliable trade source like BizMiner.com, the Annual Statement Studies published by the Risk Management Association, or the Almanac of Business and Industrial Financial Ratios published by CCH.
To review financial ratios:
From the Financial Ratios screen, use the Select Period drop-down list to specify the period you want to review.
The Financial Ratios screen provides a table to display the ratios you specify for the specified period, with columns for the YTD Ratio and the Prior Year Ratio for your company, if available, and an Industry Standard column for comparison.
Click Setup
from the action bar to open the Ratios
Setup dialog.
The dialog lists a description and the formula for all of the available
ratios.
Enter a ratio in the Industry Standard column for any of the listed ratios. Use a leading minus sign (-) for negative ratios.
Click the checkbox in the Select
column to indicate the ratios to display in the table.
You can select any number of the available ratios. Your entries are
retained for upcoming periods.
Click Save to see the ratios you selected in the table.
Working Capital
Measures short term liquidity or the ability to meet short term obligations.
Current Assets - Current Liabilities
Current Ratio
Measures short term liquidity or the ability to meet short-term obligations. Test of debt paying ability.
Current Assets / Current Liabilities
Quick Ratio (Acid Test)
Measures short term liquidity without considering inventory, the least liquid current asset. This ratio measures the ability to meet short term obligations.
Quick Assets / Current Liabilities
Accounts Receivable to Working Capital
Measures the relationship between working capital and the ability to collect receivables.
Accounts Receivable / Working Capital
Inventory to Working Capital
Measures the relationship between working capital and inventories and therefore sales. Warns of cash flow problems and excess inventory.
Inventory / Working Capital
Long-term Liabilities to Working Capital
Measures the relationship between Long-term Liabilities and Working Capital, or the extent long term debt has been used to replace working capital.
Long-term Liabilities / Working Capital
Sales to Working Capital
Measures the relationship between Working Capital and Sales. Determines how much Working Capital is dependent on Sales.
Sales / Working Capital
Days Cost of Sale in Inventory
Measures the amount of activity or liquidity of the inventory. Can determine if adequate inventory is in place.
(# of Days * Inventory) / Cost of Goods Sold
Note: This ratio requires a count of days. Days are counted year-to-date. For example, if you do an analysis of the half year, 365/2 days are used. For a monthly comparison, 30.417-day increments are used.
Accounts Receivable Turnover
Measures the time it takes receivables to turn over or the amount of time between a sale and the receipt of payment.
Credit Sales / Accounts Receivable
Days Sales in Receivables
Measures the average amount of time it takes to collect on outstanding receivables. Can identify the strength of collection policies.
(# of Days * Accounts Receivable) / Sales
Note: This ratio requires a count of days. Days are counted year-to-date. For example, if you do an analysis of the half year, 365/2 days are used. For a monthly comparison, 30.417-day increments are used.
Operating Cycle Days
Measures the average amount of time it may take to transform raw product and convert the finished product into cash.
Days Cost of Sales in Inventory + Days Sales in Receivables
Note: This ratio requires a count of days. Days are counted year-to-date. For example, if you do an analysis of the half year, 365/2 days are used. For a monthly comparison, 30.417-day increments are used.
Average Payment Period
Determines the average aging of the accounts payable.
Accounts Payable / (Purchases / # of Days)
Note: This ratio requires a count of days. Days are counted year-to-date. For example, if you do an analysis of the half year, 365/2 days are used. For a monthly comparison, 30.417-day increments are used.
Days Cost of Sales in Payables
Determines the average aging of the accounts payable and the bill-paying tendencies of the entity.
(# of Days * Accounts Payable) / Cost of Goods Sold
Note: This ratio requires a count of days. Days are counted year-to-date. For example, if you do an analysis of the half year, 365/2 days are used. For a monthly comparison, 30.417-day increments are used.
Asset Turnover
Measures whether the volume of business sales is sufficient based on the amount of capital invested.
Sales / Beginning Assets
Debt Ratio
Measures the proportion of the entities' assets which are financed.
Liabilities / Assets
Debt-to-Equity Ratio
Measures the proportion of long term funding provided by creditors compared to the funding provided by the owners.
Long-term Liability / Owners' Equity
Owners' Equity Ratio
Measures the proportion of funding provided by the owners compared to the total assets of the entity.
Owners' Equity / Assets
Times Interest Earned
Measures the ability to make contractual interest payments.
Earnings before Interest and Taxes / Interest Expense
Gross Profit Margin
Measures the percentage of each sales dollar retained in the entity after having paid for the cost of goods utilized in production.
(Sales - Cost of Goods Sold) / Sales
Net Profit Margin
Measures the percentage of each sales dollar retained in the entity after all expenses have been paid.
Revenue - Expenses / Revenue
Operating Profit Margin
Measures the proportion of pure profits ignoring any financial or government charges.
(Operating Revenue - Expenses + Interest Expenses + Income Tax) / Operating Revenue
Return on Assets
Measures the ability of entity decision makers to make effective management policies to generate profits with the entity's available assets.
(Revenue - Expenses) / Assets
Return on Equity
Measures the sales dollar benefit to the owners based on the beginning equity.
(Revenue - Expenses) / Beginning Owners' Equity
Retention Ratio
Measures the proportion of net income retained for use in the future economic planning of the entity.
1- (Dividends / (Revenue - Expenses))
Potential Growth Ratio
Measures the future potential growth rate based on current statistics.
((Revenue - Expenses) / Beginning Equity) * (1- Dividends / (Revenue - Expenses))
Altman Z-Score
Evaluates the financial health of a company. Scores above 3 are considered healthy, while scores below 1.8 are considered unhealthy.
(Working Capital / Total Assets) * 1.2 +
(Retained Earnings / Total Assets) * 1.4 +
(Earnings before Interest and Taxes / Total Assets ) * 3.3 +
(Total Equity / Total Liabilities ) * .6 +
(Total Sales / Totals Assets ) * .999