Ratio Increases Decreases Comparison

Current Ratio Good liquidity Risk of cash shortage >1 is good; <1 signals risk
Quick Ratio Strong immediate May lack immediate cash >1 is better
liquidity
Cash Ratio Extremely safe Possible liquidity issues >1 is rare; 0.2–0.5 is
typical
Debt Ratio Higher financial risk Safer capital structure <50% indicates financial
safety
D/E Ratio More debt financing More equity financing <1 is generally safer
(risky) (safer)
FCCR Good ability to cover Potential inability to cover >1.5 is good; <1 is a
fixed costs costs warning sign

Accounts Faster collection of Slower collection; higher Higher = more efficient

Receivable receivables; better credit risk of bad debts receivables management
Turnover control
Days Sales in Slower collection; more Faster collection; better Lower = better; faster
Receivables working capital tied up liquidity cash conversion
Inventory Faster inventory sales; Slow-moving stock; risk of Higher = more efficient
Turnover efficient stock obsolescence inventory use
management
Days Sales in Inventory held longer; Quick turnover; better stock Lower = better inventory
Inventory lower efficiency management control
Total Asset More revenue generated Inefficient use of assets Higher = better use of
Turnover per dollar of assets company’s assets
Operating Strong control of High operating expenses; Higher = more profit
Income Margin operating costs weak pricing power from core operations
Return on Higher profitability from Operating assets Higher = better asset
Operating Assets core assets underperforming utilization
Operating Asset Better turnover of Operating assets used Higher = more
Turnover operating assets inefficiently productive use of
operational resources
Sales to Fixed Fixed assets generate Underutilized Higher = better capital
Assets more revenue equipment/facilities asset efficiency
Debt to Equity More debt used → Safer capital structure; less Lower = generally safer;
(D/E) higher financial risk leverage depends on industry
Debt to Tangible High leverage vs. Strong tangible equity base Lower = more financial
Net Worth tangible equity → risky vs. debt stability
Net Profit Retaining more profit High costs or shrinking sales Higher = better overall
Margin per dollar of sales profitability
Gross Profit Good cost control or Increased production costs or Higher = more efficient
Margin pricing strategy competitive pressure production and pricing
strategy

Comment on the trend:

"The trends in the financial ratios show [improvement/decline] in [specific area(s)], with [key
ratios] reflecting [positive/negative] changes, indicating [overall financial health or specific
implications]."
The [increase/decrease] [ratios] from X at the end of 20xx to Y in the end of 20xx indicate a
[positive/negative] trend in [liquidity].
Evaluate the results of your computation:
"The computed financial ratios show [overall trend], with [key ratios] indicating
[positive/negative] performance, suggesting [overall financial health or areas for
improvement]."

Ratio Increases Decreases Comparison

ROI Investments are Poor investment Higher = more efficient
(Return on generating higher returns performance or high capital investment use
Investment) → effective capital use cost
ROS Higher profit per unit of Profit shrinking due to high Higher = better profitability
(Return on revenue → strong cost costs or pricing pressure from revenue
Sales = Net control or pricing
Profit Margin)
ROA Assets are used more Inefficient asset utilization Higher = more productive
(Return on effectively to generate or low profits use of total assets
Assets) profit
ROE Higher returns for Low profitability or Higher = better for equity
(Return on shareholders → attractive overcapitalized investors, but check leverage
Equity) for investors
ROCE Capital (debt + equity) Poor performance or Higher = strong operational
(Return on generates higher returns excessive capital employed and capital efficiency
Capital → efficient use of long-
Employed) term funds

Degree of Increases profit potential

Reduces financial risk, but A higher DFL indicates more
Financial but also raises financial
also lowers profit potential. debt usage and higher risk; a
Leverage risk. lower DFL suggests more
(DFL) conservatism and less debt
usage.
EPS (Earnings Increases shareholder Decreases shareholder Higher EPS indicates better
Per Share) profit, indicating good profit, possibly due to financial performance and is
financial performance. reduced revenue or higher attractive to investors.
costs.
P/E Ratio Market expects high Market expects little Comparing with industry
(Price to growth, but stock may be growth, possibly making it peers helps determine the
Earnings) overvalued. a buying opportunity for market’s expectations for the
undervalued stock. company.
Percentage of Company reinvests Company shares more Compared with other
Earnings earnings into the earnings with shareholders, companies, this shows
Retained business, supporting reducing its ability to whether the company focuses
long-term growth. reinvest. on reinvestment or dividend
payout.
Dividend Company pays out a high Company retains more Comparing with industry
Payout Ratio dividend, appealing to earnings for reinvestment peers helps understand the
investors seeking income or debt reduction. company’s dividend payout
from dividends. strategy.
Dividend Yield High dividend yield, Low dividend yield, as the Comparing with other
appealing to investors company retains most of companies shows the income-
seeking stable income the earnings rather than generating potential of the
from dividends. distributing them. company’s dividend.
Book Value Increases company asset Decreases asset value, Comparing with other
Per Share value, possibly due to possibly due to asset companies helps assess the
growing net assets or reductions or financial company’s asset value if all
efficient use of capital. difficulties. assets were liquidated, versus
market value.