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 its assets to earn net income.

Rate earned on average stockholders equity

Calculation: (January 1 Stockholders Equity + Dec 31 Stockholders Equity) / 2 =Average Stockholders Equity Calculation: Net Income After Federal Income Tax / Average Stockholders Equity = Rate Earned on Average Stockholders Equity

Rate earned on average stockholders equity

Definition: Investors 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: Stockholders 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 investors 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 Stockholders Equity / Total Assets = Equity Ratio Definition: This ratio shows the percentage of assets that are provided by Stockholders equity.

Equity Per Share

Calculation: Total Stockholders Equity / Shares of Capital Stock Outstanding = Equity per share Definition: this tells stockholders how much ownership of the company each share represents.

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