FINANCIAL RATIO ANALYSIS

Liquidity or Short-term Solvency

Ratio Formula Meaning

Current Assets Measures the ability of a company to cover its short-term

1. Current Ratio
Current Liabilities liabilities with its current assets.

Quick Assets
Current Liabilities
2. Quick Ratio or Acid- Measuring the level of the most liquid current assets
Test Ratio available to cover current liabilities.
QA = cash + trading securities +
trade and other receivables
3. Current Assets to
Total Assets or Current Assets Suggests the relative liquidity of the total assets and
Working Capital to Total Assets shows the proportion of current assets to total assets.
Total Assets
4. Each current asset
Each Current Asset Item Indicates liquidity of the current assets and the
item to total current
Total Current Assets breakdown of each component.
assets

Cash & Cash Equivalents + Trading

Gauges the firm’s ability to pay current financial
5. Cash Flow Liquidity Securities + Cash flow from
obligations by considering cash and other cash
Ratio Operating Activities
equivalents.
Current Liabilities

6. Defensive Interval Current Liabilities

Indicates the coverage of current liabilities.
Ratio Cash & Cash Equivalents

Asset Management Efficiency and Liquidity

Ratio Formula Meaning

Number of times average receivables are collected.

1. Receivable Net Sales or Net Credit Sales
It measures how quickly and efficiently a company
Turnover Average Receivables
collects their receivables.

2. Average Collection
365 days or 360 days It indicates the number of days the firm collects its
Period or Number of
Receivable Turnover average receivables.
Days in Receivable

3. Merchandise Cost of Goods Sold Number of times average inventory was disposed of
Turnover Ave. Merchandise Inventory during the accounting period.

4. Finished Goods Cost of Goods Sold Number of times average inventory was disposed of
Turnover Ave. Finished Goods Inventory during the accounting period.

5. Work in Process Cost of Goods Sold Manufactured Number of times average inventory was produced
Turnover Ave. Work in Process Inventory during the accounting period.

6. Raw Materials Raw Materials Used Number of times average raw materials inventory
Turnover Ave. Raw Materials Inventory was used during the period.

7. Number of Days in 365 days or 360 days Numbers of days by which inventories are used or
Inventory Inventory Turnover sold.

Signifies the pace by which working capital is used.

8. Working Capital Net Sales
Indicates the adequacy of working capital in the
Turnover Average Working Capital
firm’s operations.

Net Purchases or
Net Credit Purchases Measures how quickly a company pays off the
9. Payable Turnover
Ave. Trade & Other Payables or Accounts money owed to suppliers.
Payables
 Cash Operating Costs Indicates the ability of the firm’s cash to pay the
10. Days Cash
365 days or 360 days average daily cash obligations.

Net Sales Measures how efficiently a company uses its total

11. Asset Turnover
Average Total Assets assets to generate revenues.

12. PPE Turnover or

Net Sales Indicates the firm’s ability to efficiently manage their
Fixed Asset
Average PPE Assets PPE to generate revenues.
Turnover

Utilization of Debt and Company Stability

Ratio Formula Meaning

Total Liabilities Measures the amount of debt capital a firm uses
1. Debt to Equity Ratio
Owner’s Equity compared to the amount of equity capital it uses.

Owner’s Equity
2. Equity to Debt Ratio Measures the margin of safety of creditors.
Total Liabilities

3. Equity or Owner’s Equity Measures the proportion of the firm’s assets coming
Proprietary Ratio Total Assets from its owners.

Total Liabilities Measures the percentage of a company’s total

4. Debt Ratio
Total Assets assets that is financed by debt.

5. Fixed Assets to
PPE or Fixed Assets (net) Measures the portion of the owner’s equity used to
Total Owner’s
Owner’s Equity acquire fixed assets.
Equity

6. Fixed Assets to PPE or Fixed Assets (net) Signifies whether the firm over or under invested in
Total Assets Total Assets PPE.

7. Fixed Assets to
PPE or Fixed Assets (net) Measures the extent covered by the carrying value of
Total Long-term
Total Long-term Liabilities PPE to long-term obligations.
Liabilities

Net Sales
8. Plant Turnover Signifies the firm’s efficiency in using their PPE.
Ave. PPE or Fixed Assets (net)

Measures the carrying value of net assets for every

9. Book Value per Ordinary Shareholders’ Equity ordinary share outstanding. Indicates the amount
share Number of Ordinary Shares Outstanding which the shareholders can recover if firm sells its
assets upon liquidation.

Net Income before

10. Number of times Signifies the firm’s capacity in paying fixed interest
Interest and Income taxes
interest earned charges.
Annual Interest Charges

Firm’s Profitability and Return to Owners

 Ratio Formula Meaning
1. Net Profit Ratio or
Net Profit Margin or Net Income Measures the amount of net income per peso of sales. It
Rate of Return on Net Sales compares a company’s net income to its net revenue.
Sales
Return on Sales x Asset Turnover
Measures how efficiently a firm utilizes its assets and
2. Rate of Return to Or
measures the company’s profitability in using their total
Total Assets (ROA) Net Income
assets.
Average Total Assets

Net Sales Measures how efficiently a company uses its total assets to
3. Asset Turnover
Average Total Assets generate revenues.

Gross Profit
4. Gross Profit Ratio Measures the gross profit per peso of sales revenue.
Net Sales

Operating Income Measures the portion of sales revenue used to cover

5. Operating Ratio
Net Sales operating costs.

Cash flow from

6. Cash Flow Margin Operating Activities Indicates the firm’s ability to translate sales into cash.
Net Sales

7. Rate of Return on
Net Income Gauges management efficiency in using current assets to
Current Assets or
Ave. Current Assets generate net income.
Working Capital

8. Rate of Return on
Net Income Measures management efficiency in using net working
Net Working Capital
Ave. Net Working Capital capital to generate revenue.
(CA – CL)

9. Rate of Return on Net Income

Indicates the amount of return per peso of owners’ equity.
Owner’s Equity Ave. Owner’s Equity

Net Income – Pref. share dividend

requirement Measures the peso return on each ordinary share issued.
10. Earnings per share
No. of Outstanding Ordinary Signifies the firm’s ability to pay dividends.
Shares

Market Price per share Indicates the relationship between the market price of
11. Price-earnings ratio
Earnings per share ordinary shares and the earnings of each ordinary share.

12. Earning-price ratio Earnings per share Measures the rate at which the share market is capitalizing
or capitalization rate Market Price per share the value of current earnings.

Dividends paid or declared Indicates the earnings distributed to the owners on a per
13. Dividends per share
Ordinary Shares Outstanding share basis.

14. Payout ratio or Dividends per share Measures the percentage of the company’s earnings paid to
Dividends payout Earnings per share owners.

15. Retained Earnings Retained Earnings Measures the profitability of declaration of dividends by the
to Share Capital Share Capital firm.