FINANCIAL RATIO ANALYSIS
LIQUIDITY RATIO
LEVERAGE, CAPITAL STRUCTURE, SOLVENCY, AND EARNING COVERAGE RATIO
ACTIVITY RATIO
MARKET RATIO
PROFITABILITY ANALYSIS
ACTIVITY RATIO:
It helps to measure how efficiently a company manages its current assets and its current liability.
ACCOUNT RECEIVABLE ACTIVITY RATIO: It indicates the speed with which the company collects its amount of receivables.
ACCOUNT RECEIVABLES TURN OVER RATIO: It measures how efficiently the company manages its account receivables.
ACCOUNT RECEIVABLES TURNOVER RATIO= NET ANNUAL CREDIT SALE/AVERAGE ACCOUNT RECEIVABLES
AVERAGE ACCOUNT RECIEVABLES =BEGINNING ACCOUNT RECIEVABLE+END A/C RECIEVABLES/2
NOTE: It is used to measure the number of times receivables turn over during a year time or are collected and replaced with new account receivables.
>AVERAGE COLLECTION PERIOD:
It is also called days sales in account receivables
It is the average number of days receivables are held before being collected.
AVERAGE COLLECTION PERIOD= 365/ACCOUNT RECEIVABLE TURNOVER RATIO
>INVENTORY ACTIVITY RATIO:
It measures how efficiently the company manages its inventory.
>INVENTORY TURNOVER RATIO=ANNUAL COGS/AVG INVENTORY
>AVG INVENTORY=BEG INVENTORY+ENDING INVENTORY/2
>AVERAGE SALES INVENTORY:
It is also called days sales inventory
It is the average number of days precured to sell an inventory.
Day sales in inventory=365/inventory turnover ratio
Or
Avg inventory/annual cogs×365
>ACCOUNT PAYABLE ACTIVITY RATIO;
It indicates the speed with which the company pays its suppliers.
>ACCOUNT PAYABLE TURNOVER RATIO:
It measures how efficiently the company manages its account payable.
Account payable turnover ratio=annual credit purchase÷avg account payable
Average account payable = beg a/c payable +end a/c payable ÷2
Note: the number of times payable turnover or are paid and new once are generated by new purchase during a year.
>AVERAGE PAYMENT PERIOD
It is also called days purchase in account payable.
It represents the average number of days the company types to pay its payable.
TOTAL ASSET TURNOVER RATIO:
Total asset turn over ratio= sales÷average total asset
Average total asset = beg asset+end asset÷2
It measures the amount of sales revenue the company generates from the average total asset.
It also measures the overall efficiency of the company's use of all its investments.
Assets include both current and noncurrent assets.
FIXED ASSET TURNOVER RATIO:
It measures the amount of sale revenue the companies generate from their fixed asset. [PPE]
FIXED ASSET TURNOVER = SALES÷AVERAGE NET PROPERTY, PLANT, EQUIPMENT.
Or
sales÷average net fixed asset
NET FIXED ASSET= FIXED ASSET-ACCUMULATED DEPRECIATION
PROFITABILITY RATIO:
The following are the different profitability ratios.
a.Gross profit margin percentage
sales-cogs=gross profit
net sale= sale-discount – sales return
gross profit margin percentage= gross profit÷net sale
b. operating profit margin percentage
operating profit margin percentage= gross profit-operating expenses
c.Net profit margin percentage:
net profit margin percentage= net income÷net sales
NET INCOME:
Operating profit
+interest to dividend income
-interest expenses
Nonoperating gain/loss
=profit before tax
-tax
-Net profit for continuity operating gain/loss discounted operations
=net income
d.EBIT MARGIN RATIO:
=EBITDA÷NET SALES
EBITDA stands for earning before interest tax depreciation and amortization
E. RETURN ON INVESTMENT CAPITAL:
It has 2 classifications
a.ROA [return on asset ]
b. ROE [return on equity]
>return on investment capital measures the return [income] generated by covered capital.
RETURN ON ASSET: It measures how much the company earns on the capital it has invested in its asset.
ROA=INCOME÷AVERAGE ASSET
AVG ASSET= BEG ASSET+ END ASSET÷2
Note: ROA also used in the effectiveness of measures
Measuring the profitability
Measuring the forecasted earnings
Planning, budgeting,
RETURN ON EQUITY:
ROE=INCOME÷AVG EQUITY