Ratio Analysis - Theory

Gross Profit Margin

A financial metric that shows the percentage of revenue that exceeds the cost of goods sold, indicating the efficiency of production.

Net Profit Margin

A profitability ratio that indicates how much of each dollar earned translates into profits, after all expenses are paid.

Current Ratio

A liquidity ratio that measures a company's ability to pay its short-term obligations, calculated as current assets divided by current liabilities.

Quick Ratio

A financial liquidity ratio that measures a company's ability to meet short-term obligations using its most liquid assets, excluding inventory.

Debt-to-Equity Ratio

A leverage ratio that compares a company's total liabilities to its shareholder equity, indicating the relative proportion of debt used to finance assets.

Interest Coverage Ratio

A financial ratio used to determine how easily a company can pay interest on outstanding debt, calculated as earnings before interest and taxes (EBIT) divided by interest expenses.

Asset Turnover Ratio

A financial metric that measures the efficiency of a company's use of its assets in generating sales revenue, calculated by dividing sales by average total assets.

Accounts Receivable Aging Report

A comprehensive analysis that categorizes a company's accounts receivable based on the length of time an invoice has been outstanding, used to assess payment collection efficiency.

Inventory Turnover

A ratio that shows how many times a company's inventory is sold and replaced over a period, indicating inventory management efficiency.

Non-Operating Income

Revenue generated from activities not related to the core operations of the business, such as investments or asset sales.

Earnings Per Share (EPS)

A financial metric indicating the portion of a company's profit allocated to each outstanding share of common stock, used by investors to measure profitability.

Dividend Policy

A company's approach to distributing profits back to shareholders through dividends, affecting investor returns.

Macroeconomic Factors

Economic indicators such as inflation, interest rates, and commodity prices that can influence the overall economic environment and affect financial performance.

Limitations of Ratio Analysis

Drawbacks include reliance on historical data, lack of industry context, varying accounting policies, and ignoring non-financial factors.

One-Time Events in Financial Analysis

Occasional income or expenses that can significantly distort financial results, affecting the reliability of ratio analysis.

Financial Statement Manipulation

The intentional misrepresentation of financial performance through accounting practices, potentially misleading stakeholders.