by Dutch
12. July 2010 00:46
Ratio Analysis
-Relationship between items or groups of items in the financial statement.
-What is financial statement?
Income statement
Balance sheet
-expressed in terms of another figure
-mathematical yardstick- measures the relation ship between two figures
I Balance Sheet Ratios:
1. Current Ratio = Current Assets / Current Liabilities Std 2:1
2. Liquid Ratio = Quick Assets / Quick Liabilities Std 1:1
3. Proprietary Ratio = Proprietor’s Fund* / Total Assets Std Neither be
too high or too low
*Equity + R.S + Pref+ Surplus - Miscellaneous
4.Stock working capital Ratio:= stock / Working capital Std 1:1
Higher ratio indicates weak working capital
5. Capital Gearing Ratio = Fixed income bearing securities /Non fixed income bearing securities
High geared = fixed interest bearing securities are greater than equity
shareholders fund
Low geared = just opposite to the above Std 1:4
6. Debt Equity Ratio = Long term debts / Shareholders Funds Std 2:1
7. Fixed Assets Ratio = Fixed Assets / Long term funds
II. Revenue Statement Ratios:
8.Gross Profit Ratio = Gross Profit / Net Sales 100
9.Operating Ratio = Operating Cost / Net Sales 100
Manufacturing Concern – high
Other firms’ -low
10.Expenses Ratio = Concerned Expense / Net Sales 100
11.Net Profit Ratio = Net profit / Net Sales 100
12.Net Operating Profit Ratio = Operating Profit / Net Sales 100
Operating profit = GP- all expenses including finance
13.Stock Turnover Ratio = Cost of Goods Sold/ Average Stock
Std.: Seasonable based on nature of production
III Combined/ Composite Ratios:
14. Return on Capital Employed = NPBIT / Capital Employed 100
-indicate the management efficiency
- productivity of capital utilized
- overall efficiency.
15. Return on Proprietors Funds = NPAT / Proprietors Funds 100
16.Return on Equity Share capital = NPAT-Pref.Dividend / Equity share capital
17.Earnings per share = NPAT- Pref. Dividend / No of Equity Shares
18.Dividend / Payout Ratio = Divi. Per Equity share / EPS
19.Divi. Yield Ratio = Divi. Per share / Mkt price per share
20.Price –Earning Ratio = Mkt. Price Per Share / EPS
21.Debt Service Ratio = NPBIT / Interest
( Interest coverage Ratio)
22.Creditors Turnover Ratio = Credit Purchase /Average Accounts Payable
C.P.Period = days/ months in a year / CTR
23.Debtors Turnover Ratio = Credit Sales / Average Accounts Receivable
D.C.Period = days/ months in a year / DTR
24.Fixed Assets Turnover Ratio = Sales / Fixed Assets
25.Total Assets Turnover Ratio = Sales / Total Assets
26.Working Capital Turnover Ratio = Sales / Working Capital
27.Capital Turnover Ratio = Sales/ Capital employed.
by Dutch
16. April 2010 23:00
Ratio Analysis Formula
Liquidity Ratios
Ratio |
Formula
|
Location
|
Explanation
|
|
Current Ratio
|
Current Asset
Current Liabilities
|
B.S. Asset portion
B.S. Liability portion
|
To indicate the ability to meet currently maturing obligations
|
|
Quick Test
|
Quick Asset
Current Liabilities
|
B.S. Asset portion
B.S. Liability portion
|
To indicate instant debt paying ability
|
|
Inventory to Net Working Capital
|
Inventory
(Current Assets – Current Liabilities)
|
B.S. Asset portion
B.S. Liability & Asset portion
|
To indicate the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory
|
|
Cash Ratio
|
Cash + Cash Equivalents
Current Liabilities
|
B.S. Cur. Asset
B.S. Liability portion
|
To indicate how many current obligations can be met with cash or cash equivalents
|
Profitability Ratios
Ratio |
Formula
|
Location
|
Explanation
|
|
Net Profit Margin (%)
|
Net profit After Taxes
Net Sales
|
Income Statement
Income Statement
|
Indicates the revenue required to earn a dollar profit after tax
|
|
Gross Profit Margin (%)
|
Sales – Cost of Goods Sold
Net Sales
|
Income Statement
Income Statement
|
Indicates the profit available for non-manufacturing overhead
|
|
Return On Investment (%)
|
Net Profit After taxes
Total Assets
|
Income Statement
Balance sheet
|
Indicates the efficiency that management uses the companies assets
|
| |
|
|
|
|
Earnings per Share ($)
|
(Net Profit After Tax – Preferred stock Dividends)
Average # Of Common Shares
|
(Income Statement-B.S)
B.S. (sometimes)
|
Indicates the after tax earnings for the common stock shareholders
|
Activity Ratios
Ratio |
Formula
|
Location
|
Explanation
|
|
Inventory Turnover
|
Net Sales
Inventory
|
Income Statement
Balance sheet
|
To assess the efficiency in the management of Inventory
|
|
Days Of Inventory (days)
|
Inventory
COGS/365
|
Balance sheet
Income Statement
|
To assess the efficiency in the management of Inventory
|
|
Net Working Capital Turnover
|
Net Sales
Net Working Capital
|
Income Statement
Balance sheet (CA-CL)
|
To assess the effectively the Net Working Capital is used to generate sales
|
|
Asset Turnover
|
Sales
Total Assets
|
Income Statement
Balance sheet
|
To assess the amount of sales generated by each asset dollar
|
|
Fixed Asset Turnover
|
Sales
Fixed Assets
|
Income Statement
Balance sheet
|
To assess the amount of sales generated by each fixed asset dollar
|
|
Average Collection Period (days)
|
Accounts Receivable
Sales for Year/365
|
Balance Sheet
Income Statement
|
To assess the efficiency in the management/collection of Accounts receivable
|
|
Accounts Receivable Turnover
|
Annual Credit Sales
Accounts Receivable
|
Work sheet &/or Sub. Ledgers
Balance Sheet
|
To assess the efficiency in the management/collection of Accounts receivable
|
|
Accounts Payable Period
|
Accounts Payable
Purchases for year/365
|
Balance Sheet
Work sheet
|
To assess the efficiency in the management/payment of A/P
|
Leverage Ratios
|
Ratio
|
Formula
|
Location
|
Explanation
|
|
Debt to Asset Ratio (%0
|
Total Debt
Total assets
|
Balance Sheet
Balance Sheet
|
Assess the amount of borrowed funds used to finance company assets
|
|
Debt to Equity Ratio (%)
|
Total Debt
Shareholder’s Equity
|
Balance Sheet
Balance Sheet
|
Assess the funds provided by creditors versus the funds by owners
|
|
Long Term Debt to Capital Structure (%)
|
L –T debt
Shareholder’s Equity
|
Balance Sheet
Balance Sheet
|
Assess the long-term component of the capital structure
|
|
Time Interest Earned (dec.)
|
Profit pre tax + Interest Charges
Interest Charges
|
Income Statement
Income Statement
|
Indicates the ability of the company to meet its annual interest
|
|
Coverage of Fixed Charges (dec.)
|
Profit pre tax + Interest Charges +Lease Charges
Interest Charges +Lease Charges
|
Income Statement
Income Statement
|
Assess the company’s ability to meet all of its fixed expenses
|
|
Current Liabilities to equity (%)
|
Current Liability
Shareholders Equity
|
Balance Sheet
Balance Sheet
|
Assess the short-term financing portion versus that provided by owners
|
Other Ratios
|
Ratio
|
Formula
|
Location
|
Explanation
|
|
Price/Earnings Ratio
(Dec.)
|
Market price per Share
Earnings per share
|
Stock Market Reports
Income Statement
|
Assess the amount investors are willing to pay for each dollar of earnings
|
|
Dividend Payout Ratio
(%)
|
Annual dividends per Share
Annual Earnings per Share
|
Income Statement
Income Statement
|
Indicates the percentage of profit that is paid out as dividends
|
|
Dividend Yield on Common Stock
(%)
|
Annual dividends per Share
Current Market price per share
|
Income Statement
Stock Market
|
Indicates the dividend rate of return to common shareholders at the current market price
|
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