Financial Ratio

Financial Ratios: Calculations used to evaluate a company's financial performance and stability

• comparison between companies and industries (all sizes)

  • insights into operational efficiency, profitability, and liquidity.

• Identify financial strengths and weaknesses

• Guides decision-making for Internal and External entities

5 Types of Financial Ratio

• Liquidity Ratio = Short term obligations

  Can the company pay their short term liabilities with its current assets??

  • Current Ratio = Current Asset / Current Liabilities

    • Is there enough current assets to cover short term liabilities?

      • Above 1.0 : Yes!! they have enough CA to pay short term liabilities ) financial Stability ✅

  • Quick Acid Ratio = Current Assets - Inventory / Current Liabilities

    • Can the company cover it short term liabilities without relying on Inventories (fixed Assets)???

      • Above 1.0 : Yes!!! the they don’t need to rely on fixed assets to pay short term liabilities. No liquidity issue ✅

  • Cash Ratio = Cash and Marketable Securities / Current Liabilities

    • Can the company cover for its short term liabilities with only cash (very liquid) immediately?

      • Above 1.0 = Yes!! the company has cash or very quick liquid to pay its short term liability quickly ✅

  • Interval Measure = Current Assets/ Average daily operating cost

    • How long can company operate using only current assets only before meeting funding?

      • Higher = they can operate/survive for long period of time with out funding

• Solvency (leverage) Ratio = Debt + Risk (Long term)

  How much debt + risk does the company have?

  Debt Ratio

  • Long-Term debt ratio = Long-term debt / (Long-term debt + Total equity)

    • how much proportion of a company’s total capital is financed by its long term debt?

Coverage Ratio

• Solvency (Levarage) Ratio = Debt + Risk

• Liquidity Ratios: Measure a company's ability to meet short-term obligations, such as the current ratio and quick ratio.

• Profitability Ratios: Indicate how effectively a company generates profit relative to its revenue and expenses, including gross margin and return on equity.

• Leverage Ratios: Assess the degree to which a company is financing its operations through debt, such as debt-to-equity and interest coverage ratios.

• Efficiency Ratios: Evaluate how well a company utilizes its assets and liabilities to generate sales and maximize profits, including inventory turnover and asset turnover ratios.