financial ratio analysis with formulas

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  • 7/30/2019 Financial Ratio Analysis With Formulas

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    Financial Ratio Analysis with FormulasBlog, Financial ReportsNo Comments

    Financial ratio analysis is the mathematical relationship between two selected numerical values pulled from acompanys financial statement. There are many ratios used in business to figure such things out as a companyssolvency, 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 andbetween a single company and its industry average. In order to effectively use ratios, they must bebenchmarked 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 thatare 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 ofcash flows or statement of retained earnings.

    Financial ratios results in quantifiable data about a specific aspect of a company. Financial ratios are

    categorized based on the financial topic of the business inwhich the ratio measures.

    Activity ratios: measures how quickly a firm converts non-cash assets within the balance sheet to cash orsales.

    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

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    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 orGross 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 offinancial ratio formulas which can help you calculate financial ratios in a givenproblem.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

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

    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