Glossaries - Report Companions: Financial Ratios Glossary - Page 2

EBITDA: EBITDA: Business Revenue: Earnings Before Interest, (income) Taxes due, Depreciation and Amortization divided by Business Revenue. EBITDA: Business Revenue is a relatively controversial (and often criticized) metric designed to eliminate the effect of finance and accounting decisions when comparing companies and industry benchmarks. Tax credits and deferral procedures and non-cash expenditures (Amortization and Depreciation) are not deducted from the profit equation, as are interest expenditures.

Return on Assets: Pre-Tax or After Tax Net Profit divided by Total Assets, a critical indicator of profitability. Companies which use their assets efficiently will tend to show a ratio higher than the industry norm. The ratio may appear higher for small businesses due to owner compensation draws accounted as net profit.

Return on Net Worth: Pre-Tax or After Tax Net Profit divided by Net Worth. This is the ‘final measure’ of profitability to evaluate overall return. This ratio measures return relative to investment, how well a company leverages the investment in it. May appear higher for small businesses due to owner compensation draws accounted as net profit.

Return on Business Revenue: Pre-Tax or After Tax Net Profit Net Profit divided by Annual Business Revenue, indicating the level of profit from each dollar of business revenue. This ratio can be used as a predictor of the company’s ability to withstand changes in prices or market conditions. May appear higher for small businesses due to owner compensation draws accounted as net profit.

Assets: Business Revenue: Total Assets divided by Net Business Revenue, indicating whether a company is handling too high a volume of business revenue in relation to investment. Very low percentages relative to industry norms might indicate overly conservative sales efforts or poor sales management.

Cost of Sales:Accounts Payable: Measures the number of times payables turn over in the course of the year. High measures may indicate cash flow concerns.