financial ratios

Financial RatiosFinancial Ratios

Analyzing How a Business Analyzing How a Business PerformsPerforms

Why Do Ratio Analysis?Why Do Ratio Analysis?

MeasurableMeasurable

VerifiableVerifiable

BenchmarkingBenchmarking

Track-recordTrack-record

Where Do I Get My Where Do I Get My Information FromInformation From

Financial StatementsFinancial Statements

Balance SheetBalance Sheet

Income Income StatementStatement

Types of RatiosTypes of Ratios

LiquidityLiquidity

ProfitabilityProfitability

EfficiencyEfficiency

LiquidityLiquidity

Measures how well a company can Measures how well a company can satisfy its debts.satisfy its debts.


Measures how much profit the company Measures how much profit the company generates based upon its sales.generates based upon its sales.

EfficiencyEfficiency

Measures how well a company uses its Measures how well a company uses its assets to generate income.assets to generate income.

Analyze TrendsAnalyze Trends

Look at a minimum of two years to see Look at a minimum of two years to see how the company is performing. how the company is performing. Three years or more is beneficial.Three years or more is beneficial.

Industry StandardsIndustry Standards

How the company is performing against How the company is performing against other companies within the same other companies within the same industry.industry.

Liquidity RatiosLiquidity Ratios

Tells us if a company can meet their Tells us if a company can meet their current liabilities with their current current liabilities with their current assets.assets.

Current RatioCurrent Ratio

Current Assets divided by Current Current Assets divided by Current LiabilitiesLiabilities

Current AssetsCurrent Assets

CashCash

DebtorsDebtors

StockStock

Current LiabilitiesCurrent Liabilities

CreditorsCreditors

Notes PayableNotes Payable

Accrued ExpensesAccrued Expenses

Quick RatioQuick RatioQuick Assets divided by Current LiabilitiesQuick Assets divided by Current Liabilities

Quick Assets = Current Assets less StockQuick Assets = Current Assets less Stock

Some assets are not that liquid – Some assets are not that liquid – especially Stockespecially Stock

Think how long it has taken Circuit City Think how long it has taken Circuit City and Home Depot Expo to conduct their and Home Depot Expo to conduct their liquidation sale.liquidation sale.

What Does This MeanWhat Does This Mean

In generalIn general

Current Ratio should be 2 or moreCurrent Ratio should be 2 or more

Quick Ratio should be at least 1Quick Ratio should be at least 1

Indicates that the company has money Indicates that the company has money left over to work with once it has left over to work with once it has satisfied its current liabilities.satisfied its current liabilities.

Working CapitalWorking Capital

Not a Ratio but a dollar figure – how Not a Ratio but a dollar figure – how much money is left after our Current much money is left after our Current Assets are used to satisfy our Current Assets are used to satisfy our Current Liabilites.Liabilites.


Sales Revenue (Turnover) will always be Sales Revenue (Turnover) will always be the denominator used.the denominator used.

Gross Profit MarginGross Profit Margin

Measures how much money a company Measures how much money a company nets after it sells its inventory. nets after it sells its inventory.

Helps the company to determine if its Helps the company to determine if its pricing is adequatepricing is adequate

Net Profit MarginNet Profit Margin

Net Income divided by Sales RevenueNet Income divided by Sales Revenue

Measures how much profit a company Measures how much profit a company makes as a percentage of salesmakes as a percentage of sales

Efficiency RatiosEfficiency Ratios

Debtor DaysDebtor Days

Measures how timely a company Measures how timely a company collects its outstanding Trade Debts.collects its outstanding Trade Debts.

Debtors divided by Sales times 365.Debtors divided by Sales times 365.

Inventory Turnover RateInventory Turnover Rate

Measures how many times a company Measures how many times a company replaces the dollar value of its replaces the dollar value of its inventory.inventory.

Inventory divided by Sales times 365Inventory divided by Sales times 365

What to Look ForWhat to Look For

Trade Debtors TurnoverTrade Debtors Turnover

The longer debt is outstanding the The longer debt is outstanding the longer the company does not have use longer the company does not have use of the moneyof the money

Inventory TurnoverInventory Turnover

Each industry will have its own general Each industry will have its own general standard. How does this company standard. How does this company compare? How have the ratios compare? How have the ratios changed over the years.changed over the years.