A. Debt
to Worth – compares the capital contributed by creditors
to capital contributed by owners and generated by a business through
operations. The ratio is defined as:
Total Liabilities
Net Worth
The higher the ratio,
the more leveraged the business and the greater the risk assumed
by creditors.
B. Debt
to Tangible Worth
– compares the capital contributed by creditors to the tangible
capital contributed by owners and generated by a business through
operations (tangible worth). Tangible worth is defined as net
worth less intangibles assets (e.g., patents, trademarks, organizational
costs, etc.). The ratio is defined as:
Total
Liabilities
Tangible Net Worth
The higher the ratio,
the more leveraged the business and the greater the risk assumed
by creditors.
A. Common
Sizing – This is used to compare the different line items
of the balance sheet and profit and loss statements. Common sizing
of the balance sheet is accomplished through dividing line items
by total assets in the same year. Common sizing of the profit
and loss statement is accomplished through dividing line items
by net sales in the same year. Individual line items can be analyzed
in each individual period and significant fluctuations in line
items can be identified over multiple periods.
B. Return
on Assets – identifies a business’ return in relation
to its total asset size. This measure is usually expressed as
a percent. The ratio is defined as:
Profit before
Taxes
Total Assets
The higher the figure,
the higher the productivity generated by a business’ management
from its use of business assets.
C. Return
on Equity – identifies a business’ return in relation
to its equity capital. This measure is usually expressed as a
percent. The ratio is defined as:
Profit before
Taxes
Net Worth
The higher the figure,
the higher the productivity generated by a business’ management
in relation to the business’ equity capital. A high return on
equity can also be representative of the use of high leverage
(too much debt).
D. Return
on Sales – identifies a business’ return in relation
to its net sales. This measure is usually expressed as a percent.
The ratio is defined as:
Profit before
Taxes
Net Sales
The higher the figure,
the higher the proportion of net profit that results from sales.
