FINANCIAL RATIOS

• FINANCIAL RATIO ANALYSIS

  Helps determine the financial status and performance of a company. Among the most important users of such data are providers of capital to the company like suppliers, financial institutions and investors. (SFI)
• OBJECTIVES OF FINANCIAL RATIO ANALYSIS

  Financial Ratios are useful for evaluation the past financial performance of a company
• FINANCIAL RATIOS: CONCEPTS/TECHNIQUES

  Financial statement ratios used in evaluating a company’s financial position and performance are in four (4) categories:

  -       Profitability Ratios

  -       Turnover or asset-utilization ratios

  -       Liquidity ratios

  -       Leverage or long-term solvency ratios
• PROFITABILITY RATIOS

  This indicates the company’s ability to recover its operating expenses and generate a surplus for shareholders.

  -       Gross Profit Margin

  -       Net Profit Margin

  -       Return on Equity
• Gross Profit Margin - Reflects the company’s ability to cover its manufactured or purchased cost of merchandise.
• Gross Profit Margin =

  (Sales – Cost of Sales) / Sales
• Net Profit Margin

  Is a “bottom line” ratio indicating the company’s ability to generate surplus for its stockholder
• Net Profit Margin =

  Net income / Sales
• Return on Equity

   

  -       The stockholders would like to evaluate management’s ability to generate returns on their average investment and may set concise input-output relationship in financial statements.
• Return on Equity =

  Net income / Average Stockholders’ Equity

   
• Average Stockholders’ Equity

  =Total Stockholders' Equity (b) + Total Stockholders' Equity (e) / 2

   
• Operating Return on Assets

  = Operating Income / Average Total Assets
• Net Return on Assets

  = Net Income / Average Total Assets
• TURNOVER RATIOS

   

  Indicate the efficiency in the utilization of the company’s assets. The typical turnover ratio relates an output or activity measure, sales or cost of sale, against investment in specific assets
• TURNOVER RATIOS

   

  -       Total Asset Turnover (TAT)

  -       Fixed Asset Turnover (FAT)

  -       Accounts Receivable Turnover (ART)

  -       Inventory Turnover (IT)
• Total Asset Turnover

   

  -       Reflects the aggregate, company-wide efficiency in asset utilization.
• Total Asset Turnover

  = Sales / Average Total Assets
• Fixed Asset Turnover

   

  Traces the degree of fixed asset utilization in sales performance
• Fixed Asset Turnover

  = Sales / Average Fixed Assets
• Average Fixed Assets

  = Fixed Assets (B) + Fixed Assets (E)/2
• Accounts Receivable Turnover

   

  -       It is the relationship between credit sales and average accounts receivable balance.
• Accounts Receivable Turnover

   

  -       It is the relationship between credit sales and average accounts receivable balance.
• Inventory Turnover

  -       Is the ratio of cost goods sold to average inventory. As in AR, management would like to minimize investment in inventories but could only do so with an acceptable level of stockouts.
• Inventory Turnover

  = Cost of Goods Sold / Average Inventory  
• LIQUDITY RATIOS

   

  Liquidity ratios are measures of the company's capacity to meet current obligations from out of its liquid assets.
• LIQUDITY RATIOS

   

  ·         Current ratio (CR)

  ·         Quick ratio (QR)
• Current Ratio

   

  -       The most direct relationship between the company’s current resources and its current obligations.
• Current Ratio

  = Current Assets / Current Liabilities 
• Quick Ratio

   

  -       Measures the firm’s capacity to cover its short-term obligations using only its more liquid assets. Inventories are excluded from current assets in calculating this ratio.
• Quick Ratio

  = Current Assets less inventory / Current Liabilities 
• LEVERAGE RATIOS

   

  This indicates the overall dependence of the company on outside creditors relative to stockholder and internal financing
• Debt to Total Asset Ratio

   

  -       In this ratio, all debts, whether current or long-term, is compared against total asset.
• Debt to Asset Ratio

  = Total Debt (Add) / Total Assets 
• TOTAL DEBT

  =Total Current Liabilities + Long Term Debt
• Debt to Equity Ratio

   

  The focus of this ratio is on the long-term financing section of the balance sheet.
• Debt to Equity Ratio

  = Long term Debt / Equity