FINANCIAL RATIO ANALYSIS

• Financial Ratio Analysis- involves the computation of percentages, fractions, or proportions using certain formulas. This analysis is designed to emphasize the meaningful relationships between financial data.
• Financial ratios are broadly classified into the following:

  ·       Profitability ratios

  ·       Financial Health Ratio (Liquidity ratios)

  ·       Activity ratios (Asset management ratios)

  ·       Leverage ratios (Debt management ratios)
• Profitability ratios- provide a measure of the performance of a business in terms of its ability to generate profit from its resources.
• Gross profit ratio- shows the relationship between sales and cost of goods sold
• Net profit ratio- measures profitability after considering all income and expenses.
• Return on assets- measures the profit generated in relation to the total resources available to the business.
• Return on equity (Return on net assets)- measures the profit generated in relation to the resources invested by (or attributable to) the owner/s of the business.
• Current ratio- the most commonly used ratio in measuring the ability of a business to pay its short-term debts.
• Quick ratio (Acid-test ratio)- a much stricter ratio used to measure the ability of a business to pay its short-term debts.
• Working Capital- similar to current ratio but measures the ability of the business to pay its short term debts by the excess or deficiency of current assets over current liabilities. (CA-CL)
• • Activity ratios (Asset Management Ratios)- provide a measure of how efficient a business is utilizing its resources.
• Inventory Turnover- is a measure of the number of times inventory is sold and replenished during a period.
• Days of inventory (Average sale period)- is a measure of the number of days inventory is held before its sold.
• Accounts receivable Turnover- is a measure of the number of times accounts receivable have been collected during a period. It is an indication of the efficiency in collection.
• Days of receivable (Average collection period)- is a measure of the average time to collect a receivable
• Leverage ratios (Debt management ratios)- provide a measure of the extent a business uses debt financing or “leverage”.
• Debt ratio (debt-to-asset ratio)- measures the proportion of assets financed through debt.
• Equity ratio- measures the proportion of assets financed through equity.
• Debt-to-equity ratio- indicates how much debt is used to finance the assets relative to the amount pertaining to the owner’s
• Interest coverage ratio- measures the company’s ability to cover the interest expense on its liability
• Label the ff formula.

  A) gross profit/net sales

  B) operating income/ net sales

  C) net income/ net sales

  D) net income/average assets

  E) net income/average equity

  
• Label the ff formula.

  A) CA/CL

  B) QA/CL

  
• Label the ff formula.

  A) net sales/average assets

  B) net sales/average fixed assets

  C) cogs/average inventory

  D) 365/inventory turnover

  E) net sales/average ar

  F) 365/ar turnover

  
• Label the ff formula.

  A) total debt/ equity

  B) total debt/total assets

  C) total equity/total assets

  D) operating income/interest expense