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 based 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

## 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 based 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 RatiosAverage Collection Period= Accounts Receivable/(Annual Credit Sales/365 days)Receivables Turnover= Net Credit Sales/Average Net ReceivablesDegree of Operating Leverage (DOL)= % Change in Net Operating Income/% Change in SalesAverage Payment Period= Accounts Payable/(Annual Credit Purchase/365 days)Asset Turnover= Net Sales/Total AssetsStock Turnover Ratio= Cost of Goods Sold/Average InventoryInventory Conversion= 365 days/Inventory TurnoverInventory Conversion Period= (Inventory/Cost of Goods Sold)/365 DaysReceivables Conversion Period= (Receivables/Net Sales)/365 DaysPayables Conversion Period= (Accounts Payables/Purchases)/365 DaysCash Conversion Cycle= Inventory Conversion Period + Receivables Conversion Period – Payables Conversion PeriodLiquidity RatiosCurrent Ratio (Working Capital Ratio)= Current Assets/Current LiabilitiesCash Ratio= Cash and Marketable Securities/Current LiabilitiesOperating Cash Flow Ratio= Operating Cash Flow/Total DebtsDebt RatiosDebt Ratio= Total Liabilities/Total AssetsDebt to Equity Ratio= (Long-term Debt + Value of Leases)/Average Shareholders EquityLong-term Debt to Equity= Long-term Debt/Total AssetsTimes Interest Earned Ratio= Net Income/Annual Interest ExpenseDebt Service Coverage= Net Operating Income/Total Debt ServiceProfitability ratiosGross Margin, Gross Profit Margin or Gross Profit Rate =Gross Profit/Net SalesGross Margin= (Net Sales – Cost of Goods Sold)/Net SalesProfit Margin= Net Profit/Net SalesReturn on Equity (ROE)= Net Income/Average Shareholders EquityReturn on Assets (ROA)= Net Income/Average Total AssetsReturn on Net Assets (RONA)= Net Income/(Fixed Assets + Working Capital)Return on Capital (ROC)= EBIT (1-Tax Rate)/Invested CapitalEfficiency Ratio= Non Interest Expense/RevenueNet Gearing= Net Debt/EquityBasic Earning Power Ratio= EBIT/Total AssetsMarket RatiosEarnings per share (EPS)= Net Earnings/# of SharesPayout Ratio= Dividends/Earnings or EPSP/E Ratio= Market Value per Share/Earnings per Share (EPS)Dividend Yield= Annual Dividends per Share/Price per ShareCash Flow Ratio= Market Price per Share/Present Value of Cash Flow per SharePrice to Book Value Ratio= Market Price per Share/Balance Sheet Price per SharePrice/Sales Ratio= Market Price per Share/Gross Sales## Next ArticleCFA Exam Dates 2016