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UNIT
2
Financial statements and ratios
19
DID YOU KNOW
?
Some other common ratios are given below. Match the ratios with the formulas (1–7) and the
descriptions (a–g).
1
interest expenses
5 revenue – cost of goods sold
liabilities – accounts payable
revenue
2 net income – dividends on preferred stock
6 cost of goods sold
average shares
average inventory
3 net income
7 market value per share
shareholder’s equity
earnings per share
4 total liabilities
shareholder’s equity
a Gives the company’s pricing policy and mark-up margins. An adequate gross margin allows a
company to pay its expenses, and then expand.
b Determines the average interest rate at which a company borrows funds.
c Compares the current market price with earnings to calculate if a stock is over or under valued.
Used as a prediction or expectation of future performance.
d Indicates the return a company gets on the owners’ investment. Companies that make high
returns often do not require more debt investments.
e Shows the turnover of inventory, and can be compared against sales figures, to show the demand
for the company’s products.
f Indicates what proportion of equity and debt an enterprise uses to finance its assets. A more
stringent test is to use just the long-term debt.
g Calculates the profit made on a per-share basis. This is quoted by U.S. publicly held companies in
their financial statements.
gross profit margin
•
earnings per share
•
return on equity
•
average
interest rate
•
debt/equity ratio
•
inventory turnover
•
price/earnings ratio
Saying equations/formulas
+ plus, and, add
– minus, less, subtract
÷
divided by
— divided by, over
x multiplied by, times
= equals, is
a
x
b
=
c a
times (or multiplied by)
b
equals
c
a
–
b a
minus
b
divided by (or over)
c
c
total assets total assets divided by total
total liabilities liabilities
8