Financial Statements Analysis and Ratio (Terms and Definitions)

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  • Ratio – An expression of the mathematical relationship between one quantity and another. The relationship may be expressed either as a percentage, a rate, or a simple proportion.
  • Ratio analysis – A technique for evaluating financial statements that expresses the relationship between selected financial statement data.
  • Horizontal analysis – A technique for evaluating a series of financial statement data over a period of time, to determine the increase (decrease) that has taken place, expressed as either an amount or a percentage.
  • Vertical analysis – A technique for evaluating financial statement data that expresses each item within a financial statement as a percent of a base amount.
  • Acid-test (quick) ratio – A measure of a company’s immediate short-term liquidity; computed by dividing the sum of cash, short-term investments, and net receivables by current liabilities.
  • Current ratio – A measure used to evaluate a company’s liquidity and short-term debt-paying ability; computed by dividing current assets by current liabilities.
  • Asset turnover – A measure of how efficiently a company uses its assets to generate sales; computed by dividing net sales by average assets.
  • Debt to total assets ratio – Measures the percentage of total assets provided by creditors; computed by dividing total debt by total assets.
  • Inventory turnover – A measure of the liquidity of inventory; computed by dividing cost of goods sold by average inventory.
  • Liquidity ratios – Measures of the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
  • Payout ratio – Measures the percentage of earnings distributed in the form of cash dividends; computed by dividing cash dividends by net income.
  • Price-earnings (P-E) ratio – Measures the ratio of the market price of each share of common stock to the earnings per share; computed by dividing the market price of the stock by earnings per share.
  • Profit margin – Measures the percentage of each dollar of sales that results in net income; computed by dividing net income by net sales.
  • Profitability ratios – Measures of the income or operating success of an enterprise for a given period of time.
  • Receivables turnover – A measure of the liquidity of receivables; computed by dividing net credit sales by average net receivables.
  • Return on assets – An overall measure of profitability; computed by dividing net income by average assets.
  • Return on common stockholders’ equity – Measures the dollars of net income earned for each dollar invested by the owners; computed by dividing net income minus preferred dividends (if any) by average common stockholders’ equity.
  • Solvency ratios – Measures of the ability of the enterprise to survive over a long period of time.
  • Change in accounting principle – The use of a principle in the current year that is different from the one used in the preceding year.
  • Comprehensive income – Includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders.
  • Discontinued operations – The disposal of a significant segment of a business.
  • Earnings per share (EPS) – The net income earned on each share of common stock; computed by dividing net income minus preferred dividends (if any) by the number of weighted average common shares outstanding.
  • Extraordinary items – Events and transactions that are unusual in nature and infrequent in occurrence.
  • Pro forma income – A measure of income that usually excludes items that a company thinks are unusual or nonrecurring.
  • Quality of earnings – Indicates the level of full and transparent information provided to users of the financial statements.
  • Times interest earned – Measures a company’s ability to meet interest payments as they come due; computed by dividing income before interest expense and income taxes by interest expense.
  • Trading on the equity – Borrowing money at a lower rate of interest than can be earned by using the borrowed money.

One thought on “Financial Statements Analysis and Ratio (Terms and Definitions)”

  1. Hello Putra,

    Could you please give me an example of how to make a vertical analysis of the Profit and Loss Statement, Balance Sheet and Cash Flow Statement for a company?

    Thank you,

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