Financial accounting ratios are used to tell the story of a businesses operations. By understanding these ratios, you can begin to understand the efficiency of the operation, how they finance their asset purchases, how leveraged the company is, and give you metrics that you can use to compare the business to its competitors. Below are some of the most common finance and accounting formulas used in business today.

Efficiency Ratios

Inventory Turnover Ratio = (Cost of Goods Sold / Inventory)

Days Sales in Inventory = (365 Days / Inventory Turnover Ratio)

Account Receivable Turnover Ratio = (Net Sales / Accounts Receivable)

Days sales outstanding = (365 days / Account Receivable Turnover Ratio)

Total Asset Turnover Ratio = (Net Sales / Total Assets)

Fixed Asset Turnover Ratio = (Net Sales / Net Fixed Assets)

Leverage Ratios

Total Debt Ratio = (Total Debt / Total Assets)

Debt-to-Equity Ratio = (Total Debt / Total Equity)

Equity (or Leverage) Multiplier = (Total Assets / Total Equity)

Profitability Ratios

Gross Profit Margin = (Net Sales – Cost of goods sold) / Net sales

Operating Profit Margin = EBIT / Net Sales

Net Profit Margin = Net Income / Net Sales

Return on Assets = Net Income / Total Assets

Return on Equity = Net Income / Total Equity

Market Value Indicators

Earnings Per Share = Net Income / Shares outstanding

Price-Earnings Ratio = Price per share / Earnings Per Share

Market-to-Book Ratio = Market value of equity per share (Stock Price) / Book value of equity per share

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