Financial Statement Analysis Ratios

Financial Ratio Analysis

  • Analytical tool to judge comparative performance using ratios of financial statement items.

Four Categories of Financial Ratios

  • Liquidity: Ability to settle current obligations.

  • Solvency: Ability to settle long-term obligations and related interest.

  • Profitability: Measures operating performance as a return on investment.

  • Market Value/Valuation: Measures potential for future earnings, dividends, and stock price growth.

Liquidity Ratios

  • Current Ratio: CurrentAssetsCurrentLiabilities\frac{Current Assets}{Current Liabilities}

  • Quick Ratio: Cash+STI+TradeReceivablesCurrentLiabilities\frac{Cash + STI + Trade Receivables}{Current Liabilities}

  • Receivable Turnover: NetCreditSalesAverageTradeReceivables\frac{Net Credit Sales}{Average Trade Receivables}

  • Average Collection Period: 360daysReceivableTurnover\frac{360 days}{Receivable Turnover}

  • Inventory Turnover: CostofGoodsSoldAverageInventory\frac{Cost of Goods Sold}{Average Inventory}

  • Average Sales Period: 360daysInventoryTurnover\frac{360 days}{Inventory Turnover}

  • Working Capital: Current Assets - Current Liabilities

Solvency Ratios

  • Debt Ratio: TotalLiabilitiesTotalAssets\frac{Total Liabilities}{Total Assets}

  • Equity Ratio: TotalEquityTotalAssets\frac{Total Equity}{Total Assets}

  • Debt to Equity Ratio: TotalLiabilitiesTotalEquity\frac{Total Liabilities}{Total Equity}

  • Times Interest Earned: EarningsBeforeInterestandTaxesInterestExpense\frac{Earnings Before Interest and Taxes}{Interest Expense}

Profitability Ratios

  • Gross Profit Ratio: GrossProfitNetSales\frac{Gross Profit}{Net Sales}

  • Operating Profit Margin: OperatingIncomeNetSales\frac{Operating Income}{Net Sales}

  • Net Profit Margin: NetIncomeNetSales\frac{Net Income}{Net Sales}

  • Return on Assets: NetIncomeAverageTotalAssets\frac{Net Income}{Average Total Assets}