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Ratio Analysis Formula

Liquidity Ratios

Ratio Formula Location Explanation

Current Ratio Current Asset B.S. Asset portion To indicate the ability to meet
currently maturing obligations
Current Liabilities B.S. Liability
portion

Quick Test Quick Asset B.S. Asset portion To indicate instant debt paying ability

Current Liabilities B.S. Liability


portion

Inventory to Net Inventory B.S. Asset portion To indicate the cushion of excess
Working Capital current assets over current liabilities
(Current Assets – B.S. Liability & may be threatened by unfavorable
Current Liabilities) Asset portion changes in inventory

Cash Ratio Cash + Cash B.S. Cur. Asset To indicate how many current
Equivalents obligations can be met with cash or
B.S. Liability cash equivalents
Current Liabilities portion

Profitability Ratios
Ratio Formula Location Explanation

Net Profit Margin Net profit After Taxes Income Statement Indicates the revenue required to
(%) earn a dollar profit after tax
Net Sales Income Statement

Gross Profit Margin Sales – Cost of Goods Sold Income Statement Indicates the profit available for
(%) non-manufacturing overhead
Net Sales Income Statement

Return On Net Profit After taxes Income Statement Indicates the efficiency that
Investment (%) management uses the companies
Total Assets Balance sheet assets

Earnings per Share (Net Profit After Tax – (Income Indicates the after tax earnings
($) Preferred stock Dividends) Statement-B.S) for the common stock
shareholders
Average # Of Common B.S. (sometimes)
Shares
Activity Ratios

Ratio Formula Location Explanation

Inventory Turnover Net Sales Income Statement To assess the efficiency in the
management of Inventory
Inventory Balance sheet

Days Of Inventory (days) Inventory Balance sheet To assess the efficiency in the
management of Inventory
COGS/365 Income Statement

Net Working Capital Net Sales Income Statement To assess the effectively the
Turnover Net Working Capital is used
Net Working Capital Balance sheet (CA-CL) to generate sales

Asset Turnover Sales Income Statement To assess the amount of sales


generated by each asset
Total Assets Balance sheet dollar
Fixed Asset Turnover Sales Income Statement To assess the amount of sales
generated by each fixed asset
Fixed Assets Balance sheet dollar

Average Collection Period Accounts Receivable Balance Sheet To assess the efficiency in the
(days) management/collection of
Sales for Year/365 Income Statement Accounts receivable

Accounts Receivable Annual Credit Sales Work sheet &/or Sub. To assess the efficiency in the
Turnover Ledgers management/collection of
Accounts Receivable Accounts receivable
Balance Sheet

Accounts Payable Period Accounts Payable Balance Sheet To assess the efficiency in the
management/payment of A/P
Purchases for year/365 Work sheet

Ratio Formula Location Explanation

Debt to Asset Ratio (%0 Total Debt Balance Sheet Assess the amount of borrowed
funds used to finance company
Total assets Balance Sheet assets

Debt to Equity Ratio (%) Total Debt Balance Sheet Assess the funds provided by
creditors versus the funds by
Shareholder’s Equity Balance Sheet owners

Long Term Debt to L –T debt Balance Sheet Assess the long-term component of
Capital Structure (%) the capital structure
Shareholder’s Equity Balance Sheet

Time Interest Earned Profit pre tax + Interest Income Statement Indicates the ability of the company
(dec.) Charges to meet its annual interest
Income Statement
Interest Charges

Coverage of Fixed Profit pre tax + Interest Income Statement Assess the company’s ability to
Charges (dec.) Charges +Lease meet all of its fixed expenses
Charges Income Statement

Interest Charges
+Lease Charges

Current Liabilities to Current Liability Balance Sheet Assess the short-term financing
equity (%) portion versus that provided by
Shareholders Equity Balance Sheet owners
Leverage Ratios

Other Ratios

Ratio Formula Location Explanation

Price/Earnings Ratio Market price per Share Stock Market Reports Assess the amount investors
are willing to pay for each
(Dec.) Earnings per share Income Statement dollar of earnings

Dividend Payout Annual dividends per Share Income Statement Indicates the percentage of
Ratio profit that is paid out as
Annual Earnings per Share Income Statement dividends
(%)

Dividend Yield on Annual dividends per Share Income Statement Indicates the dividend rate of
Common Stock return to common
Current Market price per Stock Market shareholders at the current
(%) share market price

Prepared By

P.Suthaharan