Financial Ratio Analysis with Formulas

Financial ratio analysis is the mathematical relationship between two selected numerical values pulled from a company’s financial statement. There are many ratios used in business to figure such things out as a company’s solvency, 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 and between a single company and its industry average.  In order to effectively use ratios, they must be benchmarked 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 that are 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 of cash flows or statement of retained earnings.

Financial ratios results in quantifiable data about a specific aspect of a company.  Financial ratios are categorized basedfinancial-ratio-analysis on the financial topic of the business in which the ratio measures.

  • Activity ratios: measures how quickly a firm converts non-cash assets within the balance sheet to cash or sales.
  • Liquidity ratios: measures the availability of cash to pay short-debt.
  • Debt ratios: measures the firm’s ability to repay long-term debt.
  • Profitability ratios: assesses a business’s ability to generate earnings as compared to its expenses and other costs.
  • Market ratios: measures investor response to owning a company’s stock and also the cost of issuing stock.

List of Financial 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

  • 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
  • or Gross 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

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