![]() Indicates how much net income was earned for each share of common stock outstanding.Ĭurrent ratio = Current assets Current liabilities Indicates how much net income was generated from each dollar of common shareholders’ equity.Įarnings per share = Net income − Preferred dividends Weighted average common shares outstanding Return on common shareholders’ equity = Net income − Preferred dividends Average common shareholders’ equity Indicates how much net income was generated from each dollar in average assets invested. Return on assets = Net income Average total assets ![]() Indicates the profit generated for each dollar in net sales. ![]() Profit margin ratio = Net income Net sales Indicates the gross margin generated for each dollar in net sales. Gross margin ratio = Gross margin Net sales Table 13.1 Financial Ratio Formulas Profitability Measures Table 13.1 "Financial Ratio Formulas" summarizes the formulas for all the ratios presented in this section, and Table 13.2 "Summary of Financial Ratios for " shows the ratio results for Coca-Cola, PepsiCo, and the industry averages that will be covered throughout this section. Some averages are not available or not applicable and will be noted as such.) (Note: All industry averages throughout this chapter were obtained from. Ratios used to measure market valuation (focus is on market value of the company)įor each ratio, we (1) explain the meaning, (2) provide the formula, (3) calculate the ratio for Coca-Cola for two years, and (4) compare the ratio for Coca-Cola to PepsiCo’s ratio and industry averages.Ratios used to measure long-term solvency (focus is on long-term liabilities).Ratios used to measure short-term liquidity (focus is on short-term liabilities).Ratios used to measure profitability (focus is on the income statement).What are the four categories of ratios used to evaluate the financial health of an organization?Īnswer: The four categories of ratios presented in this chapter are as follows (in order of presentation): Question: Although reviewing trends and using common-size analysis provides an excellent starting point for analyzing financial information, managers, investors, and other stakeholders also use various ratios to assess the financial performance and financial condition of organizations. Use ratio analysis to measure profitability, short-term liquidity, long-term solvency, and market valuation. ![]()
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