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Comprehensive Guide to Financial Ratios

This document discusses various types of financial ratios used to analyze companies, including profitability, liquidity, management efficiency, leverage, and valuation ratios. Profitability ratios such as gross profit rate, return on sales, return on assets, and return on equity measure how effectively a company generates profits from its assets and sales. Liquidity ratios like current ratio, acid test ratio, and cash ratio evaluate a company's ability to pay short-term debts. Management efficiency ratios examine how well a company uses its assets and liabilities, while leverage ratios assess financial risk by comparing debt to assets and equity. Valuation ratios including price-earnings ratio, dividend payout ratio, and earnings per share help estimate a company's value.

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82 views2 pages

Comprehensive Guide to Financial Ratios

This document discusses various types of financial ratios used to analyze companies, including profitability, liquidity, management efficiency, leverage, and valuation ratios. Profitability ratios such as gross profit rate, return on sales, return on assets, and return on equity measure how effectively a company generates profits from its assets and sales. Liquidity ratios like current ratio, acid test ratio, and cash ratio evaluate a company's ability to pay short-term debts. Management efficiency ratios examine how well a company uses its assets and liabilities, while leverage ratios assess financial risk by comparing debt to assets and equity. Valuation ratios including price-earnings ratio, dividend payout ratio, and earnings per share help estimate a company's value.

Uploaded by

muhammad Ahmad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Dopont analysis= NI/SALE

*SALE/ASSETS*ASSETS/EQUITY

Profit margin*assets turnover


Profitability Ratios
*financial leverage

Gross Profit Rate = Gross Profit ÷ Net Sales(Evaluates how much gross profit is generated from sales)

Return on Sales = Net Income ÷ Net Sales(Also known as "net profit margin" or "net profit rate", it measures the percentage o f income derived from dollar sales.)

Return on Assets = Net Income ÷ Average Total Assets(ROA is used in evaluating management's efficiency in using assets to generate income) pre tax.

Return on Stockholders' Equity = Net Income ÷ Average Stockholders' Equity(Measures the percentage of income derived for ever y dollar of owners' equity.)

Liquidity Ratios ability to pay off its short-term debts as using the company's current or quick assets Current Ratio = Current Assets ÷ Current Liabilities(to pay
short-term obligations using current assets)

Acid Test Ratio = Quick Assets ÷ Current Liabilities (to pay short-term obligations using the more liquid types of current assets or "quick assets)

Cash Ratio = ( Cash + Marketable Securities ) ÷ Current Liabilities

to pay its current liabilities using cash and marketable securities. Marketable securities are short-term debt instruments that are as good as cash.

Net Working Capital = Current Assets - Current Liabilities (company can meet its current obligations with its current assets; and how much excess or deficiency there
is.)

Management Efficiency Ratios how well a company uses its assets and liabilities to generate sales and maximize profits

Days Sales Outstanding = 360 Days ÷ Receivable Turnover (The shorter the DSO, the better. )

Inventory Turnover = Cost of Sales ÷ Average Inventory (Represents the number of times inventory is sold and replaced.)

Days Inventory Outstanding = 360 Days ÷ Inventory Turnover (Also known as "inventory turnover in days"., the shorter the DIO the better.)

Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover (the longer the DPO the better (as explained above).

Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding Cash Conversion Cycle = Operating Cycle - Days Payable Outstanding

Total Asset Turnover = Net Sales ÷ Average Total Assets Measures overall efficiency of a company in generating sales using its assets. Leverage Ratios

Debt Ratio = Total Liabilities ÷ Total Assets (Measures the portion of company assets that is financed by debt )

Equity Ratio = Total Equity ÷ Total Assets

The reciprocal of equity ratio is known as equity multiplier, which is equal to total assets divided by total equity.

Debt-Equity Ratio = (short term debt and long term debt )Total Liabilities ÷ Total Equity ( A D/E ratio of more than 1 implies that the company is a leveraged firm)

Current NIBL= total current libilty – shorty term debt/equity…non current NIBL= total non current libility –long tern debt/ equity (result of both ratio decide why
financial leverage increase)

ICR= Operating profit/financial exp(interest) …….DSCP=operating profit/financial expernse +short term debt

Times Interest Earned = EBIT ÷ Interest Expese

Measures the number of times interest expense is converted to income, and if the company can pay its interest expense using t he profits generated. EBIT is earnings
before interest and taxes.

Solvency Ratios :Also called financial leverage ratios, solvency ratios compare a company's debt levels with its assets, equity, and earnings to evaluate whether a
company can stay afloat in the long-term by paying its long-term debt and interest on the debt. Examples of solvency ratios include debt-equity ratio, debt-assets ratio,
and interest coverage ratio.

Valuation and Growth Ratios

Earnings per Share = ( Net Income - Preferred Dividends ) ÷ Average Common Shares Outstanding

Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share

Dividend Pay-out Ratio = Dividend per Share ÷ Earnings per Share

Valuation matrix

MCAP=price* share outstanging

Po=D1/Re-g ….p/s= M.c/revenue …..NI*PR/S /Re-g…… NI/SALE * PR / Re-g

P/E = D1/E / Re-g…..NI*PR/E / Re-g …… NI/E *PR /Re-g

TSR=P1+D / Po

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