Financial Ratios

Ratio Analysis is a technique of comparing different financial ratios produced from a company's financial statements, ratio analysis is a technique used in financial analysis to assess a company's financial performance and health. These ratios offer important information about the profitability, liquidity, solvency, efficiency, and overall operational performance of a company. Ratio analysis is a tool used by financial analysts, creditors, investors, and management to examine a company's financial health and make educated decisions.



Liquidity Ratio

The ability of a business to satisfy its short-term financial obligations without seriously disrupting its operations is measured by liquidity ratios, which are financial indicators. 
These measures evaluate a company's liquidity, or its capacity to quickly turn assets into cash. The fast ratio (sometimes called the acid-test ratio) and the current ratio are the two most popular types of liquidity ratios. 

Types of Liquidity Ratio

1. Current Ratio:

Formula: Current Ratio = Current Assets / Current Liabilities

2. Quick Ratio (Acid-Test Ratio):

Formula: Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

3. Cash Ratio (Absolute Quick Ratio):

Formula: Cash Ratio = Cash Assets / Current Liabilities


Solvency Ratio 

Solvency ratios are a class of financial indicators that evaluate a company's capacity to meet its long-term financial obligations and its general financial stability. They are also referred to as leverage ratios or financial leverage ratios. These statistics shed light on a company's capital structure, the volume of debt financing it uses, and its ability to pay back debts. Solvency ratios are crucial for assessing the risk associated with a company's financial structure and are important for investors as well as creditors.

Types of Solvency Ratio 

1. Debt-to-Equity Ratio (D/E Ratio):

Formula: Debt-to-Equity Ratio = Total Debt / Shareholders' Equity

2. Interest Coverage Ratio (ICR):

Formula: Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense 

3.  Debt Ratio:

Formula: Debt Ratio = Total Debt / Total Assets

4. Debt to Capital Ratio:

Formula: Debt to Capital Ratio = Total Debt / (Total Debt + Shareholders' Equity) 


Profitability Ratios

Profitability ratios are financial indicators that evaluate a company's capacity to produce profit in relation to its revenue, assets, equity, and other financial measures. These ratios offer insightful information regarding a company's financial performance and profitability, which is essential for assessing its general health and investor appeal.

Types of Profitability Ratios

1. Gross Profit Margin:

Formula: Gross Profit Margin = (Gross Profit / Revenue) × 100%

2. Net Profit Margin:

Formula: Net Profit Margin = (Net Profit / Revenue) × 100%

3. Operating Profit Margin:

Formula: Operating Profit Margin = (Operating Profit / Revenue) × 100%

4. Return on Assets (ROA):

Formula: ROA = (Net Profit / Total Assets) × 100%

5. Return on Equity (ROE):

Formula: ROE = (Net Profit / Shareholders' Equity) × 100%

6. Earnings Before Interest and Taxes (EBIT) Margin:

Formula: EBIT Margin = (EBIT / Revenue) × 100%

7. Return on Investment (ROI):

Formula: ROI = (Net Profit / Investment Cost) × 100%

8. Profit Margin on Sales:

Formula: Profit Margin on Sales = (Net Profit / Sales) × 100%

9. Gross Operating Profit Ratio:

Formula: Gross Operating Profit Ratio = (Gross Profit - Operating Expenses) / Revenue 


Efficiency Ratios

Efficiency ratios, often referred to as activity ratios, are financial measurements that assess how well a business uses its assets and liabilities to produce revenue and run its operations. These statistics shed light on a company's operational effectiveness, inventory control, accounts receivable collection, and asset usage. 

Types of Efficiency Ratios

1. Inventory Turnover Ratio:

Formula: Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory

2. Accounts Receivable Turnover Ratio:

Formula: Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Accounts Payable Turnover Ratio:

Formula: Accounts Payable Turnover Ratio = Purchases (or COGS) / Average Accounts Payable

4. Asset Turnover Ratio:

Formula: Asset Turnover Ratio = Revenue / Average Total Assets


Market Ratios

Market Ratios, otherwise called valuation ratios, are monetary measurements used to evaluate an organization's engaging quality to financial backers and its overall valuation in the securities exchange. These ratios assist financial backers and experts with checking whether an organization's stock is exaggerated or underestimated contrasted with its monetary presentation and potential for development. 

Types of Market Ratios

1. Price-to-Earnings Ratio (P/E Ratio):

Formula: P/E Ratio = Market Price per Share / Earnings per Share (EPS)

2. Price-to-Sales Ratio (P/S Ratio):

Formula: P/S Ratio = Market Price per Share / Sales per Share

3. Price-to-Book Ratio (P/B Ratio):

Formula: P/B Ratio = Market Price per Share / Book Value per Share

4. Enterprise Value (EV) to EBITDA Ratio:

Formula: EV/EBITDA Ratio = Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

5. Market Capitalization:

Market capitalization is the total market value of a company's outstanding shares. It is calculated by multiplying the current market price per share by the total number of outstanding shares.

6. Price/Earnings-to-Growth (PEG) Ratio:

Formula: PEG Ratio = P/E Ratio / Annual Earnings Growth Rate


The comparison of these financial ratios with time trend indicators and against competitors or industry benchmarks, is part of the ratio analysis process. It helps stakeholders to have a full understanding of how the company is performing, strengths and weaknesses, as well as possible areas for improvement. This is a key instrument for the organization's investment decisions, assessment of creditworthiness and guidance in organizational planning and finance management. 

Join us on WhatsApp: https://whatsapp.com/channel/0029Va5kdUvFi8xblGQ4sq30

Comments

Post a Comment

Popular posts from this blog

What is marketing management? What are its features and functions?

CONCEPT OF MARKETING Traditionally, marketing has been defined as activities which direct the flow of products from producers to user.                        -or- Marketing is the social process by which customers obtain what they need and want through market offerings having value relevant to customers. FEATURES OF MARKETING 1. Customer needs and wants Marketing process helps the customers to obtain products which they need and want. Need of an individual is his mental feelings that he is lacking something. Want is a mental feeling of an individual that he is able to satisfy his particular need as he has adequate resources. Wants are converted into demand for products by marketers through product offerings. 2. Creating a market offering Market offering involves providing products with features which will satisfy customer needs and wants. Products include both goods which are in physical form and services which are in non-physical form. 3. Customer value Customer value is in the form o
Read more

COMPETENCIES AND CHARACTERISTICS OF ETHICAL ENTREPRENEURS

COMPETENCIES         The success or failure of an enterprise depends upon the entrepreneurial values, attitudes and competencies. It is almost necessary that the entrepreneur possesses the necessary competencies then only he will be able to carry on his venture successfully. In the absence of these competencies, the entrepreneur may fail in his venture. Some people feel that these competencies are inherited or come by birth only. But this is not true. These competencies can be acquired through proper education, training and practice.       The entrepreneurial competencies can be classified as:           1. Behavioural Competencies.            2. Enterprise Launching Competencies.            3. Enterprise Managing Competencies. 1. BEHAVIOURAL COMPETENCIES     These competencies relate to the type of behaviour exhibited by the entrepreneur in performing various tasks. Some of these competencies are present in entrepreneur but need to be identified and nurture while others competencies c
Read more

Short Selling - how it works

Image
Short selling is a trading strategy where an investor borrows shares of a stock or other asset from a broker and immediately sells them, hoping to buy them back at a lower price in the future. The investor benefits from the difference between the sale price of the borrowed shares and the lower price of their repurchase. Short selling is often used by traders who believe that the price of a particular asset will fall, or who want to hedge their portfolio against potential losses. However, this can be a risky strategy because the potential loss from a short sale is theoretically unlimited because there is no limit to  the asset's price appreciation. Short selling is also sometimes controversial, as some critics argue that it can increase market volatility and potentially lower the prices of stocks and other assets. Therefore, short selling is often subject to regulations and restrictions in various markets around the world.  Here is an example of how short selling works:  Suppose you
Read more