Category Name Formula
Profitability ratios Return on assets (ROA) EBIT / total assets
= Relationship between profit and capital Return on equity (ROE) Net profit after tax / shareholders’ equity
Return on equity pre tax (ROEpt) Net pre-tax profit / shareholders’ equity
Average cost of debt (ACD) Interest / debt
Financial leverage (ROA – ACD) * (Debt / equity)
Solvency ratios Debt ratio Debt / total assets
= A company’s ability to meet its financial obligations Alternative financial leverage ratio (1) Equity / total assets
in the event of liquidation Alternative financial leverage ratio (2) Debt / equity
Interest coverage ratio EBIT / interest
= Indicator of financial resilience
Liquidity ratios Net working capital Current assets – current liabilities
= A company’s ability to meet its short-term financial Current ratio Current assets / current liabilities
obligations Quick ratio (acid test ratio) (Current assets – inventory) / current liabilities
Capital budgeting project Cash flow Accounting income + depreciation
= Sum of total investments in interrelated fixed and = The excess of cash revenue over cash expenditure during the
current assets life of a project. Main difference with accounting income is
depreciation
Assessment of capital budgeting projects based on: Average book rate of return (ABR) Average annual profit / average invested capital
Profitability Disadvantage: ignores the time value of money
Assessment of capital budgeting projects based on: Pay back period The time it takes a project to recover its initial investment from
Cash flow the cumulative cash flow
Assessment of capital budgeting projects based on Net present value (NPV) Present value of the expected cash flows. If NPV > 0, the project
both: is acceptable
Cash flow Internal rate of return (IRR) Discount whereby the present value of the expected cash flow
Time value of money equals the initial investment. If IRR > weighted average cost of
capital, the project is acceptable.
Interest calculation methods Simple interest Interest calculated on the initial amount only
Compound interest Interest calculated on the total initial amount and on the
accumulated past interest
Profitability ratios Return on assets (ROA) EBIT / total assets
= Relationship between profit and capital Return on equity (ROE) Net profit after tax / shareholders’ equity
Return on equity pre tax (ROEpt) Net pre-tax profit / shareholders’ equity
Average cost of debt (ACD) Interest / debt
Financial leverage (ROA – ACD) * (Debt / equity)
Solvency ratios Debt ratio Debt / total assets
= A company’s ability to meet its financial obligations Alternative financial leverage ratio (1) Equity / total assets
in the event of liquidation Alternative financial leverage ratio (2) Debt / equity
Interest coverage ratio EBIT / interest
= Indicator of financial resilience
Liquidity ratios Net working capital Current assets – current liabilities
= A company’s ability to meet its short-term financial Current ratio Current assets / current liabilities
obligations Quick ratio (acid test ratio) (Current assets – inventory) / current liabilities
Capital budgeting project Cash flow Accounting income + depreciation
= Sum of total investments in interrelated fixed and = The excess of cash revenue over cash expenditure during the
current assets life of a project. Main difference with accounting income is
depreciation
Assessment of capital budgeting projects based on: Average book rate of return (ABR) Average annual profit / average invested capital
Profitability Disadvantage: ignores the time value of money
Assessment of capital budgeting projects based on: Pay back period The time it takes a project to recover its initial investment from
Cash flow the cumulative cash flow
Assessment of capital budgeting projects based on Net present value (NPV) Present value of the expected cash flows. If NPV > 0, the project
both: is acceptable
Cash flow Internal rate of return (IRR) Discount whereby the present value of the expected cash flow
Time value of money equals the initial investment. If IRR > weighted average cost of
capital, the project is acceptable.
Interest calculation methods Simple interest Interest calculated on the initial amount only
Compound interest Interest calculated on the total initial amount and on the
accumulated past interest
