Formulas for Financial Ratios
Financial ratios
are calculated using numerical numbers from financial statements to get helpful information about a company. The figures
on a company's financial statements - the balance sheet, income statement, and
cash flow statement – are used to undertake quantitative analysis and evaluate
a company's liquidity, leverage, growth, margins, profitability, rates of
return, and valuation other things.
Financial ratios are grouped into the following
categories:
· Liquidity ratios
· Leverage ratios
· Efficiency ratios
· Profitability ratios
· Market value ratios
- Financial Ratio Analysis:
Its Applications and Users
The goal of financial ratio analysis is twofold:
1.
Keep tabs on the company's performance.
Individual financial ratios are calculated for each period, and the changes in their values over time are tracked to detect emerging trends
in a company. A growing debt-to-asset percentage, for example, may suggest that a
corporation is overwhelmed with debt and is at risk of default.
2.
Make comparative evaluations of a
company's performance.
Financial ratios are compared to key competitors to
see if a firm is performing better or worse than the industry average.
Comparing the return on assets of several companies, for example, might assist
an analyst or investor figure out which company is making the most efficient
use of its assets.
3.
Financial ratios are used by parties both
inside and outside the company:
Financial ratios are used by parties both inside and outside
the company:
External users: Financial analysts, retail investors,
creditors, competitors, tax officials, regulatory bodies, and industry watchers
are all examples of external users.
Internal users include management, personnel,
and business owners.
Ratios of Liquidity
Liquidity ratios are financial measurements that assess a
company's ability to pay back short- and long-term debt. The following are
some examples of common liquidity ratios:
A company's ability to pay down short-term liabilities
using current assets is measured by the current ratio:
Current ratio = Current assets / Current
liabilities
The acid-test ratio assesses a company's ability to repay
short-term debts with short-term assets:
Acid-test ratio = Current assets – Inventories
/ Current liabilities
A company's ability to pay down short-term creditors with
cash and cash equivalents is measured by the cash ratio:
Cash ratio = Cash and Cash equivalents /
Current Liabilities
The operating cash flow ratio is a
measure of how many times a company's current liabilities can be paid off with
cash earned in a given period:
Operating cash flow ratio = Operating cash
flow / Current liabilities
Financial Ratios of Leverage
The amount of capital that originates from debt is measured
by leverage ratios. Leverage financial ratios, in other words, are used to
assess a company's debt levels. The following are some examples of common
leverage ratios:
The debt ratio is a measurement of how much of a
company's assets are provided by debt:
Debt
ratio = Total liabilities / Total assets
The debt to equity ratio calculates
the weight of total debt and financial liabilities against shareholders'
equity:
Debt to equity ratio =
Total liabilities / Shareholder’s equity
The interest coverage ratio shows
how easily a company can pay its interest expenses:
Interest coverage ratio =
Operating income / Interest expenses
The debt service coverage ratio reveals how easily a
company can pay its debt obligations:
Debt service coverage ratio
= Operating income / Total debt service
Ratios of Efficiency
Efficiency ratios, also known as financial activity ratios, assess a company's ability to effectively employ its assets and
resources. The following are some examples of efficiency ratios:
The asset turnover ratio assesses a firm's ability to
produce revenue from its assets:
Asset
turnover ratio = Net sales / Average total assets
The inventory turnover ratio measures how many times a
company's inventory is sold and replaced over a given period:
Inventory turnover ratio =
Cost of goods sold / Average inventory
The accounts receivable turnover ratio measures how many
times a company can turn receivables into cash over a given period:
Receivables turnover ratio
= Net credit sales / Average accounts receivable
The day's sales in inventory ratio measure
the average number of days that a company holds on to inventory before selling
it to customers:
Day’s sales in
inventory ratio = 365 days / Inventory turnover ratio
Profitability Ratios
Profitability ratios assess a company's ability to create
revenue, balance sheet assets, operating costs, and equity about
income, balance sheet assets, operating costs, and equity. The following are
some examples of typical profitability financial ratios:
The gross margin ratio compares a company's gross profit
to its net sales to determine how much profit it makes after deducting its Cost
of goods sold:
Gross
margin ratio = Gross profit / Net sales
The operating margin ratio compares
the operating income of a company to its net sales to determine operating
efficiency:
Operating margin ratio =
Operating income / Net sales
The return on assets ratio measures how efficiently a
company is using its assets to generate profit:
Return on assets ratio =
Net income / Total assets
The return on equity ratio measures
how efficiently a company is using its equity to generate profit:
Return on equity ratio =
Net income / Shareholder’s equity
Ratios of Market Value
Market value ratios determine how much a
company's stock is worth. The following are some examples of market value
ratios:
The book value per share ratio determines a company's
per-share value based on the amount of equity accessible to shareholders:
Book
value per share ratio = (Shareholder's equity – Preferred equity) / Total
common shares outstanding
The dividend yield ratio measures the number of dividends
attributed to shareholders relative to the market value per share:
Dividend yield ratio =
Dividend per share / Share price
The earnings per share ratio measure the amount of net
income earned for each share outstanding:
Earnings per share ratio =
Net earnings / Total shares outstanding
The price-earnings ratio compares
a company's share price to its earnings per share:
Price-earnings ratio =
Share price / Earnings per share
Ratio Analysis – Ratios Formulae
Ratio analysis: Ratio
analysis, which is at the heart of fundamental research, aids in gaining a
better understanding of a company's financial health and its current and
future performance. The analysts employ the quantitative method to achieve this
insight, comparing and analyzing the information reported in the company's
financial records. Some equations are used for this as well.
Ratios of Market Value
Market value ratios determine how much a
company's stock is worth. The following are some examples of market value
ratios:
The book value per share ratio determines a company's
per-share value based on the amount of equity accessible to shareholders:
Liquidity Ratios
Also known as Solvency Ratios, this metric examines a
company's current assets and liabilities to determine whether it can pay
short-term loans. The present quick and burn rates are the most
commonly utilized liquidity ratios. The current balance is the most useful of the
three for determining the liquidity and solvency of start-ups.
S. No. |
RATIOS |
FORMULAS |
1 |
Current Ratio |
Current Assets/Current Liabilities |
2 |
Quick Ratio |
Liquid Assets/Current Liabilities |
3 |
Absolute Liquid Ratio |
Absolute Liquid Assets/Current Liabilities |
Profitability Ratios
These ratios look at another essential part of a company's
operations: how it uses its assets and how well it profits from those
assets and equities. This also provides the analyst with data on the efficiency
with which the company's operations are used.
S. No. |
RATIOS |
FORMULAS |
1 |
Gross Profit Ratio |
Gross Profit/Net Sales X 100 |
2 |
Operating Cost Ratio |
Operating Cost/Net Sales X 100 |
3 |
Operating Profit Ratio |
Operating Profit/Net Sales X 100 |
4 |
Net Profit Ratio |
Net Profit/Net Sales X 100 |
5 |
Return on Investment Ratio |
Net Profit After Interest And Taxes/ Shareholders Funds
or Investments X 100 |
6 |
Return on Capital Employed Ratio |
Net Profit after Taxes/ Gross Capital Employed X 100 |
7 |
Earnings Per Share Ratio |
Net Profit After Tax & Preference Dividend /No of Equity
Shares |
8 |
Dividend Pay Out Ratio |
Dividend Per Equity Share/Earning Per Equity Share X 100 |
9 |
Earning Per Equity Share |
Net Profit after Tax & Preference Dividend / No. of Equity
Shares |
10 |
Dividend Yield Ratio |
Dividend Per Share/ Market Value Per Share X 100 |
11 |
Price Earnings Ratio |
Market Price Per Share Equity Share/ Earning Per Share X 100 |
12 |
Net Profit to Net Worth Ratio |
Net Profit after Taxes / Shareholders Net Worth X 100 |
S. No. |
RATIOS |
FORMULAS |
1 |
Debt
Equity Ratio |
Total Long-Term
Debts / Shareholders Fund |
2 |
Proprietary
Ratio |
Shareholders
Fund/ Total Assets |
3 |
Capital
Gearing ratio |
Equity
Share Capital / Fixed Interest-Bearing Funds |
4 |
Debt
Service Ratio |
Net profit
Before Interest & Taxes / Fixed Interest Charges |
Working Capital Ratios
It examines whether the corporation can pay off current
debts or liabilities with existing assets, similar to the Liquidity ratios. This
ratio is essential for creditors to determine a company's liquidity and how
quickly it converts its assets into cash to pay off its debts.
S. No. |
RATIOS |
FORMULAS |
1 |
Debt Equity Ratio |
Total Long-Term Debts / Shareholders Fund |
2 |
Proprietary Ratio |
Shareholders Fund/ Total Assets |
3 |
Capital Gearing ratio |
Equity Share Capital / Fixed Interest Bearing Funds |
4 |
Debt Service Ratio |
Net profit Before Interest & Taxes / Fixed Interest
Charges |
S. No. |
RATIOS |
FORMULAS |
1 |
Debt Equity Ratio |
Total Long-Term Debts / Shareholders Fund |
2 |
Proprietary Ratio |
Shareholders Fund/ Total Assets |
3 |
Capital Gearing ratio |
Equity Share Capital / Fixed Interest-Bearing Funds |
Capital Structure Ratios
To finance its activities, each organization or company has
capital or funds. These ratios, known as Capital Structure Ratios, look at how
a company's capital or money is used structurally.
S. No. |
RATIOS |
FORMULAS |
1 |
Debt
Equity Ratio |
Total
Long-Term Debts / Shareholders Fund |
2 |
Proprietary
Ratio |
Shareholders
Fund/ Total Assets |
3 |
Capital
Gearing ratio |
Equity
Share Capital / Fixed Interest-Bearing Funds |
4 |
Debt
Service Ratio |
Net
profit Before Interest & Taxes / Fixed Interest Charges |
Overall Profitability Ratio
As the name implies, these ratios measure a firm's or
company's profitability, or how well it can turn its assets and capital into
earnings for future use.
S. No. |
RATIOS |
FORMULAS |
1 |
Overall Profit Ability Ratio |
Net Profit / Total Assets |
Conclusion: I hope the
knowledge we shared on the Ratio Analysis – Ratios Formulae topic helped
you understand these!