How to Calculate Quarterly Financial Ratios
Financial ratios establish relationships between financial statement items. They can be grouped into five categories: liquidity and debt ratios that measure the ability to meet short-term and debt commitments respectively; turnover and profitability ratios that measure profitability and value ratios that measure return on shareholder capital. Calculate quarterly ratios based on the latest quarterly financial statements.
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Liquidity
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Liquidity ratios indicate the ability of a company to pay its short-term bills. Two ratios are commonly used: current ratio and quick ratio. The current ratio is equal to current assets divided by current liabilities. The quick ratio is equal to current assets minus inventory divided by the current liabilities. The higher these ratio are, the better.
Debt
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Debt ratios indicate the ability of a company to pay its debts. The debt-to-equity ratio is equal to the total debt divided by the total equity. A high debt-to-equity ratio means less protection for creditors. The times-interest-earned ratio is equal to earnings before interest and taxes, divided by interest. This is an important ratio that tells you how well the profits are able to cover the interest charges -- the higher, the better.
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Turnover
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Asset turnover ratios indicate the company's efficiency in utilizing its assets. The sales-to-inventory ratio is equal to annual net sales divided by current inventory. It measures the rate at which inventory is converted into cash sales. If the ratio is too high, there may be an under-stocking issue. If it is too low, the inventory may be stagnant or obsolete.
Profitability
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The profitability ratios indicate management's ability to generate profits. There are three common profit ratios, all expressed as percentages. The profit margin is equal to net income divided by net sales; the return-on-assets ratio is equal to net income divided by total assets and the return-on-equity ratio is equal to net income divided by shareholders' equity. The higher these ratios are, the better.
Value
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The value ratios indicate the company's ability to generate a return on shareholder capital. The price-to-earnings ratio, or P/E ratio, is the most common. It is equal to the share price divided by the earnings per share, or EPS. The EPS is equal to the net income divided by the common shares outstanding. The higher the P/E ratio relative to the industry peer group, the better.
Considerations
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Ratios for any given year are not meaningful on a stand-alone basis. However, they are useful when compared to the company's historical performance, or to other companies in the industry peer group. The significance of financial ratios varies across industry sectors. It is easy to lose sight of the big picture by placing too much reliance on ratios.
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