Financial Ratio Analysis with Formulas

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Financial ratio analysis is the mathematical relationship between two selected numerical values pulled from a companys financial statement. There are many ratios used in business to figure such things out as a companys solvency, profitability, asset turnover, etc. Financial analysts use financial ratios to compare strengths and weaknesses of different entities. Financial ratios compares values between companies, industries, time periods for a particular company and between a single company and its industry average. In order to effectively use ratios, they must be benchmarked against something else such as another company. Financial ratios can be expressed as a decimal value, 0.20 or as an equivalent percent value, 20%. Ratios that are usually less than 1, are normally expressed as a percentage. The values we use in calculating financial ratios come from the income statement, balance sheet, statement of cash flows or statement of retained earnings. Financial ratios results in quantifiable data about a specific aspect of a company. Financial ratios are

categorized based which the ratio measures.

on the financial topic of the business in

Activity ratios: measures how quickly a firm converts non-cash assets within the balance sheet to cash or sales. Liquidity ratios: measures the availability of cash to pay short-debt. Debt ratios: measures the firms ability to repay long-term debt. Profitability ratios: assesses a businesss ability to generate earnings as compared to its expenses and other costs. Market ratios: measures investor response to owning a companys stock and also the cost of issuing stock.

List of Ratios
Activity or Efficiency Ratios

Average Collection Period = Accounts Receivable/(Annual Credit Sales/365 days) Receivables Turnover = Net Credit Sales/Average Net Receivables Degree of Operating Leverage (DOL) = % Change in Net Operating Income/% Change in Sales Average Payment Period = Accounts Payable/(Annual Credit Purchase/365 days) Asset Turnover = Net Sales/Total Assets Stock Turnover Ratio = Cost of Goods Sold/Average Inventory Inventory Conversion = 365 days/Inventory Turnover Inventory Conversion Period = (Inventory/Cost of Goods Sold)/365 Days Receivables Conversion Period = (Receivables/Net Sales)/365 Days Payables Conversion Period = (Accounts Payables/Purchases)/365 Days Cash Conversion Cycle = Inventory Conversion Period + Receivables Conversion Period Payables Conversion Period

Liquidity Ratios

Current Ratio (Working Capital Ratio) = Current Assets/Current Liabilities Cash Ratio = Cash and Marketable Securities/Current Liabilities Operating Cash Flow Ratio = Operating Cash Flow/Total Debts

Debt Ratios

Debt Ratio = Total Liabilities/Total Assets Debt to Equity Ratio = (Long-term Debt + Value of Leases)/Average Shareholders Equity Long-term Debt to Equity = Long-term Debt/Total Assets Times Interest Earned Ratio = Net Income/Annual Interest Expense Debt Service Coverage = Net Operating Income/Total Debt Service

Profitability ratios

Gross Margin, Gross Profit Margin or Gross Profit Rate = Gross Profit/Net Sales or Gross Margin = (Net Sales Cost of Goods Sold)/Net Sales Profit Margin = Net Profit/Net Sales Return on Equity (ROE) = Net Income/Average Shareholders Equity Return on Assets (ROA) = Net Income/Average Total Assets Return on Net Assets (RONA) = Net Income/(Fixed Assets + Working Capital) Return on Capital (ROC) = EBIT (1-Tax Rate)/Invested Capital Efficiency Ratio = Non Interest Expense/Revenue Net Gearing = Net Debt/Equity Basic Earning Power Ratio = EBIT/Total Assets

Market Ratios

Earnings per share (EPS) = Net Earnings/# of Shares Payout Ratio = Dividends/Earnings or EPS P/E Ratio = Market Value per Share/Earnings per Share (EPS) Dividend Yield = Annual Dividends per Share/Price per Share Cash Flow Ratio = Market Price per Share/Present Value of Cash Flow per Share Price to Book Value Ratio = Market Price per Share/Balance Sheet Price per Share Price/Sales Ratio = Market Price per Share/Gross Sales

Financial-Accounting-Ratios Formulas:
This is a collection of financial ratio formulas which can help you calculate financial ratios in a given problem.

Analysis of Profitability:

General profitability:
Gross profit ratio = (Gross profit / Net sales) 100 Operating ratio = (Operating cost / Net sales) 100 Expense ratio = (Particular expense / Net sales) 100 Operating profit ratio = (Operating profit / Net sales) 100

Overall profitability:
Return on shareholders' investment or net worth = Net profit after interest and tax / Shareholders' funds Return on equity capital = (Net profit after tax Preference dividend) / Paid up equity capital Earnings per share (EPS) ratio = (Net profit after tax Preference dividend) / Number of equity shares Return on gross capital employed = (Adjusted net profit / Gross capital employed) 100 Return on net capital employed = (Adjusted net profit / Net capital employed) 100 Dividend yield ratio = Dividend per share / Market value per share

Dividend payout ratio or pay-out ratio = Dividend per equity share / Earnings per share

Short Term Financial Position or Test of Solvency:

Current ratio = Current assets / Current liabilities Quick or acid test of liquid ratio (for immediate solvency) = Liquid assets / Current liabilities Absolute liquid ratio = Absolute liquid assets / Current liabilities

Current Assets Movement, Efficiency or Activity Ratios:

Inventory / Stock turnover ratio = Cost of goods sold / Average inventory at cost Debtors of receivables turnover ratios = Net credit sales / Average trade debtors Average collection period = (Trade debtors No. of working days) / Net credit sales Creditors or payables turnover ratio = Net credit purchase / Average trade creditors Average payment period = (Trade creditors No. of working days) / Net credit purchase Working capital turnover ratio = Cost of sales / Net working capital

Analysis of Long Term Solvency:

Debt to equity ratio = Outsiders funds / Shareholders funds or External funds / Internal funds Ratio of long term debt to shareholders funds (Debt equity) = Long term debt / Shareholders funds Proprietary of equity ratio = Shareholders funds / Total assets Fixed assets to net worth = Fixed assets after depreciation / Shareholders' funds Fixed assets ratio or fixed assets to long term funds = Fixed assets after depreciation / Total long term funds Ratio of current assets proprietors' funds = Current assets / Shareholders' funds Debt service or interest coverage ratio = Net profit before interest and tax / Fixed interest charges Capital gearing ratio = Equity share capital / Fixed interest bearing funds