Financial Equations

Hi, everyone I wanted share some basic formulas with you guys, about some finance equations. I love analyze equations and this a good stepping stone, to learn some material or master. Here's a list of some simple financial equations.


Net Income / Sales = Profit Margin

Sales / Total Assets = Asset Turnover

Total Assets / Average Shareholder Equity = Financial Leverage


When  looking at  how well a company is operating.  We need to analyze quite a bit of information before we're able to make an assumption on how well the company will preform in the future.

We look for liquidity, solvency, profitability and growth.

Liquidity:

Current Ratio = Current Assets / Current Liabilities

Net Trade Cycle = DSO + DIO - DPO

DSO  (Days Sales Outstanding) = Trade Receivables /  Revenue *360

DIO (Days Inventory Outstanding) = Inventory / Cost of Goods Sold *360

DPO (Days Payable Outstanding) = Accounts Payable / Cost of Goods Sold *360

Solvency:

Debt Ratio = Total Liabilities / Total Assets


Interest Coverage Ratio = Operating Profit (EBIT) / Interest Expense

Profitability:

ROA = EBIT / Total Assets

ROE = Net Income /  Total Equity

Debt to Equity Ratio = Total Assets / Total Equity

ROE Ratio =ROA *(Total Assets / Equity) * (Net Income/ EBIT)

Growth:

Revenue Growth = (Revenue(current year) / Revenue (previous year) -1