# Financial Statements Analysis and Ratio (Terms and Definitions)

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

houri ghorbani

Jan 1, 2013 at 8:33 pm

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,

Houri