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!