Earnings Performance, Efficiency Analysis, and Calculating Financial

Strength 

Calculations and Definitions

Earnings Performance Analysis

Rate earned on average total assets

Calculation: (January 1 total

Assets + December 31 Total Assets) / 2 = Average Total Assets

Calculation: NetIncome after Federal Income tax / Average total assets = Rate Earned on total Average Assets

Rate earned on average total assets

Definition: This total shows how well a business is

using it’s assets to earn net income.

Rate earned on average stockholders equity

Calculation: (January 1

Stockholder’s Equity + Dec 31 Stockholder’s Equity) / 2 =Average Stockholder’s Equity

Calculation: Net Income After

Federal Income Tax / Average Stockholder’s Equity = Rate Earned on Average Stockholder’s Equity

Rate earned on average stockholders equity

Definition: Investor’s use this for several

businesses to determine the best investment.

Rate earned on net sales

Calculation: Net Income After

Federal Income Tax / Net Sales = Rate Earned on Net Sales

Definition: It is used when a

business that carefully controls costs should earn a consistent rate on net sales form year to year.

Earnings per share

Calculation: Net Income After

Federal Income Tax / Shares of Capital Stock Outstanding = Earnings Per Share

Definition: Stockholder’s and

management often use this as a measure of success.

Price-earnings ratio

Calculation: Market Price Per

Share / Earnings Per Share = Price Earnings Per Ratio

Definition: This relates the

profitability to the amount that investor’s currently pay for the stock.

Efficiency Analysis

Accounts Receivable Turnover Ratio

Calculation: (Beginning Book

Value of Accounts Receivable + Ending Book Value) / 2 = Average Book Value of Accounts Receivable

Calculation: Net Sales on

Account / Average Book Value = Accts Receivable Turnover Ratio

Accounts Receivable Turnover Ratio

Definition: this ratio monitors a business’ accounts

receivable collection efficiency.

Average Number of Days for Payment

Calculation: Days In Year / Accounts Receivable Turnover Ratio = Average Number of Days For Payment

Definition: The average

number of days for the customers to pay their accounts.

Merchandise Inventory Turnover Ratio

Calculation: (January 1 Mdse

Inventory + Dec 31 Mdse Inventory) / 2 = Avg Merchandise Inventory

Calculation: Cost of

Merchandise Sold / Avg Mdse Inventory = Merchandise Inventory Turnover Ratio

Merchandise Inventory Turnover Ratio

Definition: This ratio can be used to monitor

merchandise inventory efficiency.

Financial Strength

Working Capital

Calculation: Total Current Assets

– Total Current Liabilities = Working Capital.

Use for both Current year and prior year.

Definition: this is the amount (stated in dollars) is

the amt of current assets available to the business after the current liabilities are paid.

Current Ratio

Calculation: Total Current Assets

/ Total Current Liabilities = Current Ratio

Definition: a ration that shows

the numeric relationship of current assets to current liabilities.

Acid-Test Ratio

Calculation: Total Quick

Assets(Cash +Accounts Receivable) / Total current Liabilities = Acid-Test Ratio

Definition: those current assets

that are cash or can quickly be turned into cash.

Debt Ratio

Calculation: Total Liabilities /

Total Assets = Debt Ratio

Definition: this ratio shows the

percentage of assets that are financed with borrowed capital(liabilities).

Equity Ratio

Calculation: Total Stockholder’s

Equity / Total Assets = Equity Ratio

Definition: This ratio shows the

percentage of assets that are provided by Stockholder’s equity.

Equity Per Share

Calculation: Total Stockholder’s

Equity / Shares of Capital Stock Outstanding = Equity per share

Definition: this tells

stockholder’s how much ownership of the company each share represents.

THE END