Financial Ratios

Financial ratios represent an attempt to

standardize financial information to
facilitate meaningful comparisons.
Financial Ratios

 How liquid is the firm?

 Is management generating sufficient
profits from the firm’s assets?
 How does the firm’s management
finance its assets?
 Are the shareholders receiving sufficient
returns on their investments?
Liquidity Ratios

 Does the firm have cash or near cash

assets to pay its bills on time?
Current Assets
Current Ratio=----------------------
Current Liabilities
Liquidity Ratios

 Acid Test or Quick Ratio

Current Assets- Inventory
= -------------------------------------
Current Liabilities
Efficiency Ratios

 Average Collection Period

Accounts Receivable
= -------------------------------x 360
Annual Credit Sales
Efficiency Ratios

 Inventory Turnover

Cost of Goods Sold

= ------------------------
Inventory
Efficiency Ratios

 Fixed Assets Turnover

Sales
= --------------------
Net Fixed Assets
Efficiency Ratios

 Total Asset Turnover

Sales
= ----------------
Total Assets
Leverage Ratio

 How the firm financed its assets?

 Can the firm afford the level of fixed
charges associated with its use of non-
owner-supplied funds such as bond
interest and principal repayments?
Leverage Ratio

 Debt Ratio

Total Liabilities
= --------------------
Total Assets
Leverage Ratio

 Coverage Ratio

Net Operating income or EBIT

= ----------------------------------------
Annual Interest Expense
Profitability Ratio

 How much of each sales rupees was

management able to convert into profits?
 How much profit did the firm earn on
each rupee assets under its control?
Profitability Ratio

 Gross Profit Margin

Gross Profit
= --------------------------
Net Sales
Profitability Ratio

 Operating Profit Margin

Net Operating income

= ---------------------------------------
Sales
Profitability Ratio

 Net Profit Margin

Net Income
= -------------------------
Sales
Profitability Ratio

 Operating Income Return on Investment

Net Operating Income

= ----------------------------------------
Total Asset
Profitability Ratio

 Return on Total Assets

Net Income
= -----------------------
Total Assets
Profitability Ratio

 Return On Common Equity

Net Income Available to Common Equity

=------------------------------------------------------
Common Equity