Financial Ratio Analysis Formula

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