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Accounting Formulas for Financial Statement Analysis

Updated on March 2, 2013

Many small businesses hire accountants to do their books, however they may not understand what they are looking at, or how to take their company's historical documents and make decisions for the future. By using different formulas for financial analysis, a person can come up with ratios to make it easier to find trends and parts of the company that need further looking in to. Along with a person's own records, many of these formulas are used by lenders to decide a company's risk, as well as stock holders for the same purpose. So to be a better business owner or make better investment decisions, learn these formulas and how to understand your financial statements.

Formulas You Need To Know

Gross Margin Percentage=Gross Margin/Sales

This will show you how much each dollar of your investment is making you in profit.

Earnings Per Share=(Net Income-Preferred Dividends)/Average number of common share outstanding

This equals to what each share of the company earned through the year if it is a publically traded company.

Price Earnings Ratio=Market Price Per Share/Earning per share

This will show how much each share rose through the year or accounting period.

Dividend Payout Ratio=Dividends per share/Earnings per share

This formula shows how much your dividend is on each share, as opposed to actual growth.

Dividend Yield Ratio=Dividends per share/market price per share

Another way to compare dividends to market share

Return on Total Assets=(Net Income-Preferred Dividends)/(Average total stockholder's equity-Average preferred stock)

Just like it says, this is the growth or return on your toatl asset as a business owner

Return on common stockholder's equity=(net income-preferred dividends)/(average total stockholder's equity-average preferred stock)

Same thing as above, but geared towards each stockholder

Book value per share=(Total stockholder's Equity-preferred stock)/number of common share outstanding

How much your share in the company is worth, business owner or common stock holder.

Working Capital= Current Assets-Current Liabilities

This is also called liquidity, the businesses ability to pay it's obligations and money to grow.

Current Ratio=Current Assets / Current Liabilities

Another way to figure liquidity, on a longer timeline.

Acid-test Ratio=(Cash+marketable securities+accounts recievable+short term notes-payable)/Current Liabilities

Bank's stringent formula for liquidity

Accounts Recievable Turnover=Sales on Account/Average Accounts Recievable balance

How fast you get your money owed to you for goods or services

Average Collection Period=365 days/ Accounts Recievable Turnover

How long it takes to get paid by your customers

Inventory Turnover=Cost of goods sold/average inventory balance

How long your inventory sits in storage before sold

Average Sales Period= 365 days/Inventory Turnover

Another look at inventory turnover

Times Interest Earned=Earnings before interest expense and income taxes/interest expense

How much of the profit is going to interest

Debt to Equity Ratio= Total Liabilities/ Stockholder's Equity

Another look at how your business is doing financially


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