Financial Ratio Analysis Formula

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Financial statement analysis can provide clues to underlying conditions that may not apparent from individual financial statement components.
Significant business decisions are frequently made using one or more of the analytical tool. Here illustrate a number of analytical tools that help business decision maker obtaining business objective.

Ratio Analysis for Financial Report
SI.No.
Ratio
Formula
Purpose or Use
A. Liquidity Ratios
1.00
Current Ratio
Current Assets / Current
Liabilities
Measures short term debt paying ability
2.00
Acid-Test Ratio
(Quick)
Investment + Receivables
(net) / Current Liabilities
Measures Immediate short term liquidity
3.00
Receivables Turnover
Net Credit Sales / Average
Net Receivables
Measures Liquidity of Receivables
4.00
Inventory Turnover
Cost of goods sold /
Average inventory
Measures liquidity of Inventory
B. Profitability Ratio
1.00
Profit Margin
Net Income / Net Sales
Measures net income generated by each Tk.
2.00
Assets Turnover
Net Sales / Average
Assets
Measures how efficiently assets are used to generate sales.
3.00
Return on common
stockholders' equity
Net Income / Av. Com.
Stockholders' equity
Measures profitability of owners investment
4.00
Earning Per Share
(EPS)
Net Income / Weighted
Av. Com. Share
outstanding
Measures net income earned on each share of common stock
5.00
Price Earnings
Ration (PE)
Market price per share of
stock / Earning per share
Measures ratio of market price per share to earnings per share
6.00
Payout Ratio
Cash Dividends / Net
income
Measures % of earrings distributed (cash dividend)
C. Solvency Ratios
1.00
Debt to total assets
ratio
Total Debt / Total Assets
Measures the percentage of total assets provided by creditor
2.00
Time Interest Earned
EBIT / Interest Expenses
Measurability to meet interest payments as they came due


Ratio
Formula
Purpose or Use
SHORT TERM  LIQUIDITY
Current Ratio
Current Assets / Current Liability
Assess ability to pay current liabilities from reasonably liquid assets
Quick Ratio
Receivables + Current Investments +
Cash / Current Liability
Assess ability to pay current liabilities form reasonably liquid assets.
LONG TERM SOLVENCY
Gearing Ratio
(Net Debt /  Equity) X 100

Assesses reliance on external finance.
Interest Cover
Profit Before interest Payable/Interest Payable
Assess ability to pay interest charges
Debt Ratio
(Total Current and non current liabilities / Total Assets) X 100

Assess leverage with the potential risks


PERFORMANCE
Return on capital
employed
Profit before interest and tax /(Equity + Net debt)
Effective use of resources
Return on Shareholders' Funds
Net Profit for the Period / (Share Capital + Reserves)
Effective use of resources
Gross profit margin
(Gross Profit /Revenue) X 100

Assess Profitability before taking overheads into account
Cost of sales percentage
(Cost of Sales / Revenue) X 100

Assess relationship of costs to revenue
Net Margin Operating Margin
(Profit before interest and tax / Revenue) X 100

Assess profitability after taking overheads into account
EFFICIENCY
Net Asset Turnover
Revenue / Capital employed
Assess revenue generated from asset base
Inventory Turnover
Ratio
Cost of sales / Inventory X {(Opening Inventory + closing inventory ) / 2}
Assess level of inventory held
Inventory Turnover
Period
(Inventory / Cost of sales) X 365 days
Assess the time of inventory held
Trade receivable
collection Period
(Trade Receivables / Revenue) X 365

Assess ability to turn receivables into cash
Trade Payable payments period
(Trade Payable/ Credit Purchase) X 365








Heading/Ratio
Formula
Purpose
PBIT
Profit before tax + Interest on long term
loan

Capital employed
Equity + Long term Liabilities or
Total assets - current liabilities

ROCS
Net margin x Asset turnover Or
PBIT/Capital Employed

Net Margin
PBIT / Revenue

Assets turnover
Revenue / Capital employed

INVESTORS DECISION/ MEASUREMENT
Dividend per share
Total dividend / Number of shares eligible

Dividend Cover
Earnings per share / Dividend per share

Dividend Yield
(Dividend per share/Current share price) X 100

Return on Investment (ROI)
PBIT/Total asset-Current liability) X 100

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