The Financial Ratio Report provides a useful
resource in both charting the performance of your organization and comparing
it's various financial components over a given period of time. It displays four
primary categories that measure business liquidity, activity, profitability,
and leverage. Each of these encompasses a group of ratios, derived from
account information posted to the General Ledger File, according to the
ratio type you set up in the G/L account file.
Before continuing further you should understand that even
though ratio analysis is useful it has some limitations. Ratios are calculated
with accounting data that can be affected by such variables as methods of
depreciation and inventory validation. The interpretation of this information
can vary among firms using different accounting procedures. You might want to
seek the advice of a financial consultant in clarifying the trends suggested by
this report.
Note: Due to the nature of the Ratio Calculation,
both Year To Date and Current Period values will be calculated using the same
data. The calculation for Gross Profit on Sales will be the only ratio
calculated differently for the Year To Date and Current Periods.
Calculation of Ratio's
Averages
Averages are used to calculate Activity Ratios, and affect
Balance Sheet type accounts.
The calculation used to determine the average for one of
these values is defined as follows:
Average Value = (Ending Balance for the Last Fiscal
Year + the sum of all of the Ending Balances for the periods up to the Current
Period) divided by the number of periods being evaluated plus one. The
denominator or periods are incremented by one to account for the Ending Balance
for the Last Fiscal Year added to the numerator.
By using this type of a calculation it is estimated that a
more accurate average can be calculated. For example, a calculation to
determine an average Accounts Receivable Balance for period 3 would be
calculated as follows:
(BBF+EB1+EB2+EB3)/4
BBF = The Ending Value of the Last
Fiscal Year.
EB1 = The Ending Balance of the 1st.
Period
EB2 = The Ending Balance of the 2nd.
Period
EB3 = The Ending Balance of the 3rd.
Period
Example
Acct No: 01040-00000-00000 Accounts Receivable
BBF EB1 EB2 EB3 Total Average
10,000 11,000 15,000 19,000 55,000 13,750
Annualization
An annualization of a balance is used for P&L
type Accounts and BSNI (Net Income). It is used to forecast an annual
value based on the known activity through the current period being evaluated.
The calculation to be used to estimate the Annualized
amount is calculated as follows;
[EB(CP)/CP] x (No. of Periods)
The Ending Balance for the Current Period divided by the
period number that you are in multiplied by the number of Periods in the Period
Account File.
EB(CP) = The Ending Balance for the Current Period.
CP = Current Period Number
No. of Periods = The number of periods that are in
the Period Account File.
From a statistical standpoint, using an annualized amount
for ratio calculations generates more meaningful ratio data throughout the
year. This Ratio data should be considered an interim value of the projected
Year End performance.
Example
Assuming that the Period Account File has 12 Periods and
the Current Period is Period Number 3.
Sales:
EB3 Annualized Amount
250,000 1,000,000
Ratio Categories
There are four groupings of ratios displayed. They
include Liquidity, Activity, Profitability, and Leverage ratios.
Liquidity Ratio Types
Liquidity ratios measure your organization's capability of
meeting its short term obligations. For example if your company has a
sufficient amount of liquidity, it can take advantage of new investment
opportunities and respond to a crisis.
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Ratio
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Description
and Formula
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Current
Ratio
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Measures
your organization's ability to pay it's current liabilities from cash, cash
equivalents and inventory.
Current
Ratio = CA/CL
CA = Current
Assets
CL = Current
Liabilities
Current
Assets CA are equal to the sum of the Ending Balance for the Current
Period for Cash C + Receivables R + Inventory I + Other
Current Assets CA.
Current
Liabilities CL are equal to the sum of the Ending Balance for the
Current Period for Payables P + Other Current Liabilities CL.
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Quick
Ratio
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This
is a more rigid measurement of liquidity than the current ratio. It measures
your ability to pay current liabilities with cash and receivables or
"Liquid" cash equivalents.
Quick
Ratio = (C + R + CA)/ CL.
These
values are equal to the Ending Balance for the Current Period for
C = Cash
R = Receivables
CA = Other
Current Assets
CL = Current
Liabilities.
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A/R To A/P Ratio
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Indicates
whether your company is receiving more money than it is paying out.
A/R To A/P Ratio = R/P
.
These
values are equal to the Ending Balance for the Current Period for:
R = Receivables
P = Payables.
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Activity Ratio Types
Activity ratios can be considered as a gauge that measures
the amount invested in assets by your business relative to the revenue
generated by those assets.
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Ratio
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Description
and Formula
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Asset
Turn
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Calculates
how effectively your business is employing its total assets to generate
sales.
The
Asset Turn Ratio = S/TA
S = Sales
(annualized)
TA = Total
Assets
The
Sales S value is annualized. For a complete definition and calculation of
annualization, see the Application Overview.
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|
Asset
Turn (continued)
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Total
Assets TA is the sum of the Ending Balance for the Current Period for:
Cash
C + Receivables R + Inventory I + Current Assets CA
+ Property, Plant & Equipment E - Depreciation D + Other
Non-Current Assets OA.
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Fixed
Asset Turn
|
Measures
how effectively your business is using its property, plant and/or equipment
to generate sales.
Fixed
Asset Ratio = S/(E + D)
These
values are equal to the Ending Balance for the Current Period for:
S = Sales
(annualized)
E = Property,
Plant and Equipment
D = Depreciation.
The
Sales S value is annualized. For a complete definition and
calculation of annualization, see the Application Overview.
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Receivables
Turn
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Indicates
how successful your business is at collecting receivable accounts or how many
times your receivables turn over per year.
Receivable
Turn Ratio = S/Avg R
S = Sales (annualized)
Avg
R = Average Receivables
The
Sales S value is annualized. For a complete definition and
calculation of Annualization, see the Application Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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Inventory
Turn Ratio
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Calculates
the number of times that inventory was sold and replenished during the last
year.
Inventory
Turn Ratio = CS/Avg I
CS = Cost
Of Goods Sold (annualized)
Avg
I = The
Average Inventory
The
Cost Of Goods Sold CS is annualized. For a complete definition and
calculation of Annualization, see the Application Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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A/R To Sales Ratio
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Measures
the percentage of your total sales where payment was not received at the time
of the sale.
A/R
To Sales Ratio = Avg R/S
Avg
R = Average Receivables
S = Sales (annualized)
The
Sales S value is annualized. For a complete definition and
calculation of Annualization, see the Application Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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Inventory
To Sales Ratio
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Measures
the percentage of inventory levels relative to sales.
Inventory
To Sales Ratio = Avg I/S
Avg
I = The
Average Inventory
S = Sales (annualized)
The
Sales S value is annualized. For a complete definition and
calculation of Annualization, see the Application Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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No
Of Day's In Inventory
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Measures
the typical number of days that inventory is in stock.
This
ratio coincides with the Inventory Turn Ratio.
Number
Of Day's In Inventory = Avg I/(CS/360)
Avg I = The Average
Inventory
CS = Cost Of Goods Sold
(annualized) /360
For
a complete definition and calculation of Annualization, see the Application
Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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Avg
Payment Period
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Measures
the timeliness in which your business pays its bills.
Average
Payment Period Ratio = Avg P/(CS/360)
Avg
P = Average
Payables
CS = Cost of Goods Sold
(annualized) /360
For
a complete definition and calculation of Annualization, see the Application
Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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Avg
Collection Period
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An
estimate of the average length of time your business will wait to receive
payment after making a sale. Coincides with Accounts Receivables Turn.
Average
Collection Period Ratio = Avg R/S
Avg
R =
Average Receivables
S = Sales (annualized) /360
For
a complete definition and calculation of Annualization, see the Application
Overview.
For
a complete definition of the Average Calculation, see the Application
Overview.
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Profitability Ratio Types
Profitability Ratios measure your rate of success in
generating sales over a given period of time.
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Ratio
|
Description
and Formula
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Return
On Assets Ratio
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This
ratio is also termed the rate of return on investment. It measures your
organization's net income, to total asset investment.
Return
On Assets Ratio = BSNI/TA
BSNI = Balance
Sheet Net Income (annualized)
TA = Total
Assets
The
BSNI value is annualized. For a complete definition and calculation of
annualization, see the Application Overview.
Total
Assets TA is the sum of the Ending Balance for the Current Period for Cash C
+ Receivables R + Inventory I + Current Assets CA + Property, Plant &
Equipment E - Depreciation D + Other Non-Current Assets OA.
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Profit
Margin On Sales Ratio
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Enables
you to discern the percentage of gross profit for each dollar of sales.
Profit
Margin On Sales Ratio = (S - CS)/S
These
values will use both the period net change value and the Ending Balance value
to generate both a Current Period Ratio and a YTD Ratio using the following
S = Sales
CS = Cost
Of Goods Sold.
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Return
On Net Worth Ratio
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This
ratio measures your firms net income to its total net worth.
Return
On Net Worth Ratio = BSNI/(TA - TL)
BSNI = Balance
Sheet Net Income (annualized)
TA = Total
Assets
TL = Total
Liabilities
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Return
On Net Worth Ratio (continued)
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The
BSNI value is annualized. For a complete definition and calculation of
annualization, see the Application Overview.
Total
Assets TA is the sum of the Ending Balance for the Current Period for
Cash
C + Receivables R + Inventory I + Current Assets CA + Property, Plant &
Equipment E - Depreciation D + Other Non-Current Assets OA.
Total
Liabilities TL is the sum of the Ending Balance for the Current Period for
Payables P + Other Current Liabilities CL + Long Term Liability OL.
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Financial Leverage Ratio Types
Financial Leverage ratios measure the amount of financial
burden placed on your business by it's debts.
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Ratio
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Description
and Formula
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Debts
To Assets Ratio
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Calculates
the percentage of your total assets that are financed with creditors money.
The
Debt To Asset Ratio = TL/TA
TL = Total
Liability
TA = Total
Assets
Total
Assets TA is the sum of the Ending Balance for the Current Period for Cash C
+ Receivables R + Inventory I + Current Assets CA + Property, Plant &
Equipment E - Depreciation D + Other Non-Current Assets OA.
Total
Liabilities TL is the sum of the Ending Balance for the Current Period for
Payables P + Other Current Liabilities CL + Long Term Liability OL.
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Debt
To Equity Ratio
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Contrasts
your firm's total liabilities to the amount of equity.
Debt
To Equity Ratio = TL/EQ
TL = Total
Liability
EQ = Equity
Total
Liabilities TL is the sum of the Ending Balance for the Current Period for
Payables P + Other Current Liabilities CL + Long Term Liability OL.
Equity
EQ is the sum of the Ending Balance for the Current Period for:
Retained
earnings RE + Common/Preferred stock ST + Other Equity OE + BSNI.
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Select Financial Ratio Report from the pull down G/L
Reports window. The following screen will then be displayed:
Financial Ratio Report Entry Screen
The following options are available:
* Select the desired mode from the Financial
Ratio Report menu bar
* Enter the data requested on the
screen
To return to the menu bar, press the ESC or F10
key. To leave this application, press X for EXIT when positioned
at the menu bar.
Entry Field Descriptions
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Name
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Type
and Description
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1.
Ratio Period
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2
numeric characters. Enter the period number that you want considered in the
report. This number must be on file in the Account Period File
application.
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2. Print Liquidity
Ratios?
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Y or N. Enter Y
to display liquidity ratios or N to decline. This field defaults to Y.
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3. Print Activity
Ratios?
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Y or N. Enter Y
to print activity ratios or N to decline. This field defaults to Y.
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4. Print Profitability
Ratios?
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Y or N. Enter Y
to print profitability ratios or N to decline. This field defaults to Y.
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5. Print Leverage
Ratios
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Y or N. Enter Y
to print leverage ratios or N to decline. This Field defaults to N.
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6.
Financial Entity
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5
alphanumeric characters. Enter a valid financial entity number present in
your Financial Entity File. The entity description will then
automatically display.
If
you want to skip this field, press RETURN.
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7.
Profit Center
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A
standard profit center number in the standard profit center number format.
If
your company does not use profit center, this field will be skipped. Press RETURN
to default to All profit center.
If
a non-blank financial entity was entered above, the entry of this field will
be skipped.
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Financial Ratio Report
