Financial Ratios Calculator Explanation and Information
Financial Ratios Calculator
Explanation and Information
What are financial ratios?
-
Financial ratios are a means of evaluating a company's performance or health that uses a standard of comparisons of items on the company's financial statements rather than a direct reading of the financial figures. For example, one common ratio used is the Current Ratio. This is derived by dividing the Total Current Assets by Total Current Liabilities. The result is an indication of the company's ability to cover current liabilities and how much of a margin of safety there is to cover a possible shrinkage in current assets.
How do I use the Financial Ratios Calculator
-
The Calculator has been set up to do all of the calculations of financial ratios for you, all you have to do is input the raw financial data. All of the data requested can be found in the company's annual financial statements, either the 10K or the Annual Report. The input table indicates which financial table the infomation is from, and the fields have been set up is approximately the same order that you will typically find the data.
Once all, or as many of the fields are filled in as possible, simply click on the Calculate Ratios button at the bottom. To get an idea of how this works, you can go to the Sample page which already has most of the data entered.
Caveat: Not all of the data will appear in every company's financial tables. Sometimes a company will leave out a field like Total Liabilities or Total Assets. If the information is not present in the table you are using, you can still use the Calculator, but some of the ratios will not compute. If this is the case, you will see a message to that effect in the output screen. In the case of Total Current Assets and Total Assets, the Calculator will try to compensate for the missing information by taking the sum of the asset information that is present. This may produce a ratio that is not completely accurate, or worse, grossly inaccurate. If this eventuality is unacceptable, you can either fill in these fields based on your own calculations of these figures, or completely ignore any of the ratios that are produced based on the figures in these fields.
What ratios will it give me?
-
The ratios produced by the Calculator are based on those that appear in Dun & Bradstreet's Industry Norms and Key Business Ratios and the RMA Annual Statement Studies. Most of these ratios can also be found in the Almanac of Business & Financial Ratios (commonly referred to as Troy's). Some ratios have been intentionally left out primarily because the data required to calculate the ratio does not come from the Annual Report or 10K.
What do the ratios mean?
-
Explanations of the ratios and their significance can be found in the introductory pages of Dun & Bradstreet's Industry Norms and Key Business Ratios and the RMA Annual Statement Studies. To avoid both copyright violations and finger fatigue, I have not copied those explanations here. I have, however, created a table that gives the formulae for the various ratios. I strongly encourage you to look at the explanations in D&B and RMA since they will likely provide you far greater insight than I possibly could.
Where can I get more information about financial ratios?
-
The introductory sections of Dun & Bradstreet's Industry Norms and Key Business Ratios and the RMA Annual Statement Studies provide very good explanations of using financial ratios, and ratio analysis. In addition the following books have explanations of individual ratios and ratio analysis in general:
Downes, John and Jordan Elliot Goodman. eds. Barron's Finance & Investment Handbook. 4th ed. Hauppauge NY.: Barron's Educational Services Inc., 1995.
Moffat, Donald W. Concise Desk Book of Business and Finance 2nd. ed. Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1984.
Finally, the following web sites also contain some useful information about ratios:
Edge Online Interactive Tool Box - As it turns out, after creating my Calculator, I found another one online. It doesn't calculate as many ratios, but it does have some good information about using ratios in business analysis.
Lecture Notes on Financial Ratios - This is part of a set of lecture notes from an accounting professor at Idaho State University. It has some good explanations of various ratios.
The Importance of Financial Ratios in Evaluating Financial Statements - An article from an online newsletter published by Friedman & Fuller, P.C., a CPA and Management Consulting firm in Maryland.
Quick Tips for Balance Sheet Analysis - A quick overview of various ratios from the Investorama web service.
Credit where credit is due.
-
The Financial Ratios Calculator was written in C using cgic version 1.05, an ANSI C library for CGI programming created by Thomas Boutell and Boutell.Com, Inc. In accordance with the terms of their license, I am including a link to the license agreement here.
The Calculator itself was written by Corey Murata, Business Administration Computer-Based Services Librarian, at the University of Washington Business Administration Library. Any questions or comments about the Calculator should be sent to murata@u.washington.edu.
