Financial Ratios Analysis

Definitions and terms used in Financial Ratios Calculator

Cash

Refers to money in the physical form of currency. Cash includes money in the cash pan, petty cash, cash in the locker, bank account and customers' checks.

Marketable Security

A near-cash (liquid) asset in the form of equity or debt instrument (share/stock, bond or note) that is listed on an exchange and can be readily bought or sold.

Accounts Receivable

Money owed to a company by customers (individuals or corporations) for goods or services that have been delivered or used, but not yet paid for. In it is also known as Sales on credit.

Inventory

The merchandise, raw materials and sub-assemblies, finished and unfinished products, consumables held available in stock by a business.

Prepaid expenses

Payments for goods and services that will be received in the near future. Typical prepaid expenses are: rent, insurance premium, advertising etc.

Assets

The economic resources owned by a business. The assets are divided in two major classes: tangible assets (physical resources) and intangible assets (non-physical resources and rights like goodwill, copyrights, trademarks and patents).

Current Assets

The assets that are expected to be converted into cash or otherwise used up within a year or one business cycle (whichever is longer). Typical current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, the portion of prepaid expenses which will be used within a year and other assets that could be converted to cash in less than one year.

Current Assets = Cash + Bank + Accounts Receivable + Marketable Securities + Inventory + Prepaid Expenses

Fixed Assets

An asset not directly sold to company's consumers nor consumed during the normal course of a business. These are items of value which the company has bought and will use for an extended period of time (more than a year or a business cycle). Fixed assets normally include items such as land, buildings, plant, equipment, machinery, vehicles, furniture, office equipment, fixtures and fittings.

Also known as Non-Current Assets, Long Term Assets or as Property, Plant and Equipment - PP&E

Liabilities

Present obligations of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Liabilities are usually divided into two categories: current liabilities and long-term liabilities.

Current liabilities (short term debt)

Obligations or debts that are due within one fiscal year or the operating cycle. For example, accounts payable, accrued liabilities, dividends, unpaid taxes and other debts that are due within one year.

Long-term liabilities

Obligations or debts that are due in more than one year, such as notes payable, leases, mortgage loans and other bank loans, bond repayments and other items due in more than one year. The portion of long-term liabilities that must be paid within one year is classified as current liabilities.

Equity

Represents the residual interest in the assets of the enterprise after liabilities are subtracted from assets.

Capital

The amount of equity invested in a corporation by its owners. It consists of capital stock and additional paid-in capital.

Retained earnings

The portion of net income which is not distributed to stockholders (shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific objectives (such as to pay debt or to purchase assets).

Net Income

The income that a company has after subtracting costs and expenses from the total revenue. Net income is sometimes called the bottom line.

Also known as earnings, net earnings or net profit

Net Sales

The amount of revenue generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed.

Net sales = Gross sales - Sales returns and allowances

Cost of Goods Sold (COGS)

Direct cost attributable to the production or purchasing of the goods sold by a company. It is also referred as Cost of sales.

Gross Profit

The difference between Net Sales and its Cost of Goods Sold, before deducting overhead, payroll, taxes, interest and other operating expenses.

Gross profit = Net sales - Cost of Goods Sold

Operating Expenses

The expenses incurred by a business in its normal day-to-day operations, but not directly associated with production of goods. Operating expenses include payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs etc. These expenses are divided into selling expenses and administrative and general expenses.

Operating Income

A measure of a company's profitability that excludes interest and income tax expenses. This is the surplus generated by operations and equals gross profit less all operating expenses.

Also known as Earnings before Interest and Taxes - EBIT

Operating Income = Gross profit - Operating Expenses

Interest Expenses

A fee paid on borrowed assets, the price paid for the use of borrowed money.

Income tax

The tax levied on the income of a company.

Number of employees

The number of individuals who work full time or part-time for the company.