Pocket - Ratio Analysis of Financial Statements (Formula, Types, Excel)

2/11/2019 Pocket: Ratio Analysis of Financial Statements (Formula, Types, Excel)
Ratio Analysis of Financial Statements

(Formula, Types, Excel)
By Dheeraj Vaidya, www.wallstreetmojo.com
August 2nd, 2016
Ratio Analysis of Financial Statements – This is the most comprehensive guide to Ratio
Analysis / Financial Statement Analysis
This expert-written guide goes beyond the usual gibberish and explore practical
Financial Statement Analysis as used by Investment Bankers and Equity Research
Analysts.
Here I have taken Colgate case study and calculated Ratios in excel from scratch.
Please note that this Ratio Analysis of nancial statement guide is over 9000 words and
took me 4 weeks to complete. Do save this page for future reference and don’t forget to
share it
MOST IMPORTANT – Download the Colgate Ratio Excel template to follow the
instructions
You can use the following navigation to shortlist and learn the ratio analysis of nancial
statement topic that you want to focus. Additionally, you can directly lter the core
concepts or application of types of ratio analysis in Colgate Case Studies or choose to
learn both simultaneously from the below.
I want to do Learn
I want to Learn Ratio Analysis Types
I want to learn the following
Recommended Courses
Ratio Analysis / Financial Statement Analysis – Read me First
Step 1 – Download Colgate Excel Model Ratio Analysis Template. You will be using this
template for the ratio analysis tutorial
Step 2 – Please note you will get two templates – 1) Unsolved Colgate Ratio
Analysis Model 2) Solved Colgate Ratio Analysis Model
Step 3- You should start with the Unsolved Colgate Ratio Analysis Model Template.
Follow the step by step Ratio Analysis calculation instructions for analysis. You can
download Colgate’s SEC Filings from here.
Step 4 – Happy Learning!
https://getpocket.com/a/read/1709279505 1/34
Ratio Analysis of nancial statement

I have made an easy navigation for you to learn Ratio Analysis Types.
What is Financial Statement Analysis / Ratio Analysis?

The purpose of Financial Statement Analysis (Ratio Analysis) is to evaluate management
performance in Pro tability, E ciency and Risk
Although nancial statement information is historical, it is used to project future

performance
Financial Statement Analysis (Ratio analysis) can be done using Three Methods –
Vertical Analysis (also called as Common Size Statements Analysis) – It compares

the each item of to the base case of the nancial statements. All income statement
items are expressed as percentage of Sales. Balance Sheet Items are expressed as a
percentage of Total Assets or Total Liabilities (please note Total Assets = Total
Liabilities)
Horizontal Analysis – It compares the two nancial statements (income statement,
balance sheet) o determine the absolute change as well as percentage changes.
Ratio Analysis – Puts important business variables into perspective by comparing it with
other numbers. It provides meaningful relationship between individual values in the
nancial statements.
So, which one is the best when it comes to Financial Statement Analysis?
Ofcourse, you can’t pick and choose a single method as the best and ONLY method to
do the nancial statement analysis.
You need to do all THREE analysis in-order to get a complete picture of the Company.
Let us look at each one of them one by one.
Horizontal Analysis
Horizontal analysis is a technique used to evaluate trends over time by computing
percentage increases or decreases relative to a base year.It provides an analytical link
between accounts calculated at di erent dates using currency with di erent purchasing
powers. In e ect, this analysis indexes the accounts and compares the evolution of these
over time.
As with the vertical analysis methodology, issues will surface that need to be
investigated and complemented with other nancial analysis techniques. The focus is to
look for symptoms of problems that can be diagnosed using additional techniques. Let’s
look at an example.
Ratio Analysis of Financial Statements

Ratio analysis of nancial statement is another tool that helps identify changes in a
company’s nancial situation. A single ratio is not su cient to adequately judge the
nancial situation of the company. Several ratios must be analyzed together and
compared with prior-year ratios, or even with other companies in the same industry.
This comparative aspect of ratio analysis is extremely important in nancial analysis. It
is important to note that ratios are parameters and not precise or absolute
measurements. Thus, ratios must be interpreted cautiously to avoid erroneous
conclusions. An analyst should attempt to get behind the numbers, place them in their
proper perspective and, if necessary, ask the right questions for further types of ratio
analysis.
Solvency Ratio Analysis

Solvency Ratio Analysis type is primarily sub-categorized into two parts – Liquidity
Ratio Analysis and Turnover Ratio Analysis of nancial statement. They are further sub-
divided into 10 ratios as seen in the diagram below.
We will discuss each sub category one by one.
Liquidity Ratios
Liquidity ratio analysis measure how liquid the company’s assets are (how easily can the
assets be converted into cash) as compared to its current liabilities. There are three
common liquidity ratio
1. Current ratio analysis

2. Acid test (or quick asset) ratio analysis
3. Cash Ratio analysis
#1 – Current Ratio Analysis
What is Current Ratio Analysis?

Current ratio is the most frequently used ratio to measure company’s liquidity as it is
quick, intuitive and easy measure to understand the relationship between the current
assets and current liabilities. It basically answers this question “How many dollars in
current assets does the company have to cover each $ of current liabilities”
Current Ratio Formula = Current Assets / Current Liabilities

Let us take a simple Current Ratio Calculation example,
Current Assets = $200 Current Liabilities = $100

Current Ratio = $200 / $100 = 2.0x
This implies that the company has two dollar of current assets for every one dollar of
current liabilities.
Analyst Interpretation of Current Ratio
Current ratio analysis provides us with a rough estimate that whether the company
would be able to “survive” for one year or not. If Current Assets is greater than
Current Liabilities, we interpret that the company can liquidate its current assets
and pay o its current liabilities and survive atleast for one operating cycle.
Current Ratio analysis in itself does not provide us with full details of the quality of
current assets and whether they are fully realizable.
If the current assets consists primarily of receivables, we should investigate the
collectability of such receivables.
If current assets consists of large Inventories, then we should be mindful of the fact
that inventories will take longer to convert into cash as they cannot be readily sold.
Inventories are much less liquid assets than receivables.
Average maturities of current assets and current liabilities should also be
looked into. If current liabilities mature in the next one month, then current assets
providing liquidity in 180 days may not be of much use.
Current Ratio analysis – Colgate Case Study Example

Let us now calculate the Current Ratios for Colgate.
Colgate has maintained a healthy current ratio of greater than 1 in the past 10 years.
Current ratio of Colgate for 2015 was at 1.24x. This implies that current assets of
Colgate are more than current liabilities of Colgate.
However, we still need to investigate on the quality and liquidity of Current Assets.
We note that around 45% of current assets in 2015 consists of Inventories and Other
Current Assets. This may a ect the liquidity position of Colgate.
When investigating Colgate’s inventory, we note that majority of the Inventory
consists of Finished Goods (which is better in liquidity than raw materials supplies
and work-in-progress).
source: Colgate 2015 10K Report, Pg – 100
Below is a quick comparison of Current Ratio of Colgate’s vs P&G vs Unilever
source: ycharts
Colgate’s current Ratio as compared to its peer group (P&G and Unilever) appears to
be much better.
Unilever current ratio seems to be declining over the past 5 years. However, P&G
Current ratio has remained less than 1 in the past 10 years or so.
#2 – Quick Ratio Analysis
What is Quick Ratio?
Sometimes current assets may contain huge amounts of inventory, prepaid

expenses etc. This may skew the current ratio interpretations as these are not very
liquid.
To address this issue, if we consider the only most liquid assets like Cash and Cash
equivalents and Receivables, then it should provide us with a better picture on the
coverage of short term obligations.
This ratio is know as Quick Ratio or the Acid Test.

The rule of thumb for a healthy acid test index is 1.0.
Quick Ratio Formula = (Cash and Cash Equivalents + Accounts Receivables)/Current

Liabilities
Let us take a simple Quick Ratio Calculation example,
Cash and Cash Equivalents = $100

Accounts Receivables = $500
Current Liabilities = $1000
Then Quick Ratio = ($100 + $500) / $1000 = 0.6x
Analyst Interpretation
Accounts Receivables are more liquid than the inventories.

This is because Receivables directly convert into cash after the credit period,
however, Inventories are rst converted to Receivables which in turn take further
time to convert into cash.
In addition, there can be uncertainty related to the true value of the inventory
realized as some of it may become obsolete, prices may change or it may become
damaged.
It should be noted that a low quick ratio may not always mean liquidity issues for
the company. You may nd low quick ratios in businesses that sell on cash basis
(for example, restaurants, supermarkets etc). In these businesses there are no
receivables, however, there maybe a huge pile of inventory.
Quick Ratio analysis – Colgate Case Study Example

Let us now look at the Quick Ratio calculations in Colgate.
Quick Ratio of Colgate is relatively healthy (between 0.56x – 0.73x). This acid test shows
us the company’s ability to pay o short term liabilities using Receivables and Cash &
Cash Equivalents.
Below is a quick comparison of Quick Ratio analysis of Colgate’s vs P&G vs Unilever
source: ycharts
As compared to its Peers, Colgate has a very healthy quick ratio.
While, Unilever’s Quick Ratio has been declining for the past 5-6 years, we also note that
P&G Quick ratio is much lower than that of Colgate.
#3 – Cash Ratio analysis
What is Cash Ratio analysis?

Cash ratio considers only the Cash and Cash Equivalents (there are the most liquid
assets within the Current Assets). If the company has a higher cash ratio, it is more
likely to be able to pay its short term liabilities.
Cash Ratio Formula = Cash & Cash equivalents / Current Liabilities

Let us take a simple Cash Ratio Calculation example,
Cash and Cash Equivalents = $500

Current Liabilities = $1000
Then Quick Ratio = $500 / $1000 = 0.5x
All three ratios – Current Ratios, Quick Ratios, and Cash Ratios should be looked at
for understanding the complete picture on Company’s liquidity position.
Cash Ratio analysis is the ultimate liquidity test. If this number is large, we can
obviously assume that the company has enough cash in its bank to pay o its short
term liabilities.
Cash Ratio – Colgate Case Study Example

Let us calculate Cash Ratios in Colgate.
Colgate has been maintaining a healthy cash ratio of 0.1x to 0.28x in the past 10 years.
With this higher cash ratio, the company is in a better position to payo its current
liabilities.
Below is a quick comparison of Cash Ratio of Colgate’s vs P&G vs Unilever
source: ycharts
Colgate’s Cash ratio as compared to its peers seems to be much superior.
Unilever’s Cash Ratio has been declining in the past 5-6 years.
P&G cash ratio has steadily improved over the past 3-4 years period.
Turnover Ratio Analysis of nancial statement

We saw from the above three liquidity ratios (Current, Quick and Cash Ratios) that it
answer the question “Whether the company has enough liquid assets to square o its
current liabilities”. So this ratio is all about the $ amounts.
However, when we look at Turnover ratio analysis, we try to analyze the liquidity from
“how long it will take for the rm to convert inventory and receivables into cash or time
taken to pay its suppliers”.
The commonly used turnover ratios include:
4) Receivables turnover
5) Accounts receivables days
6) Inventory turnover
7) Inventory days
8) Payables turnover
9) Payable days
10) Cash Conversion Cycle
#4 – Receivables Turnover Ratio analysis
What is Receivables Turnover Ratio analysis?
Accounts Receivables Turnover Ratio can be calculated by dividing Credit Sales by

Accounts Receivables.
Intuitively. it provides us the number of times Accounts Receivables (Credit Sales) is
converted into Cash Sales
Accounts Receivables can be calculated for the full year or for a speci c quarter.
For calculating accounts receivables for a quarter, one should take annualized sales
in the numerator.
Receivables Turnover Formula = Credit Sales / Accounts Receivables

Let us take a simple Receivables Turnover Calculation example,
Sales = $1000
Credit given is 80%
Accounts Receivables = $200
Credit Sales = 80% of $1000 = $800

Accounts Receivables Turnover = $800 / $200 = 4.0x
Please note that the Total Sales include Cash Sales + Credit Sales. Only Credit Sales
convert to Accounts Receivables, hence, we should only take Credit Sales.
If a company sells most of its items on Cash Basis, then there will be No Credit
Sales.
Credit Sales gures may not be directly available in the annual report. You may
have to dig into the Management discussions to understand this number.
If it is still hard to nd the percentage of credit sales, then do have a look at
conference calls where analysts question the management on relevant business
variables. Sometimes it is not available at all.
Accounts Receivables – Colgate Example
To calculate the receivables turnover, we have considered average receivables. We

consider the “average” gures as these are balance sheet items.
For eg. as shown in the image below, we took the average receivables of 2014 and
2015.
Also, please note that I have taken the assumption that 100% of Colgate’s Sales were
“Credit Sales”.
We note that the Receivables Turnover was less than 10x in 2008-2010. However, it
improved signi cantly in the past 8 years and is was closer to 11x in 2015.
Higher Receivables Turnover implies higher frequency of converting receivables
into cash (this is good!)
Below is a quick comparison of Receivables turnover of Colgate vs P&G vs Unilever
We note that P&G Receivable turnover ratio is slightly higher than Colgate.
Unilever’s Receivables turnover is closer to that of Colgate.
source: ycharts
#5 – Days Receivables
What is Days Receivables?

Days receivables is directly linked with the Accounts Receivables Turnover. Days
receivables expresses the same information but in terms of number of days in a year.
This provides with a intuitive measure of Receivables Collection Days
You may calculate Account Receivable days based on the year end balance sheet
numbers.
Many analysts, however, prefer to use the average balance sheet receivables number to
calculate the average collection period. (right way is to use the average balance sheet)
Accounts Receivables Days Formula = Number of Days in Year / Accounts Receivables
Turnover
Let us take the previous example and nd out the Days Receivables
Let us take a simple Days Receivables Calculation example,
Accounts Receivables Turnover = 4.0x

Number of days in a year = 365
Days Receivables = 365 / 4.0x = 91.25 days ~ 91 days
This implies that it takes 91 days for the company to convert Receivables into Cash.
Number of days taken by most analysts is 365, however, some analyst also use 360
as the number of days in the year. This is normally done to simplify the
calculations.
Accounts receivable days should be compared with the average credit period
o ered by the company. For example in the above case, if the Credit Period o ered
by the company is 120 days and they are receiving cash in just 91 days, this implies
that the company is doing well to collect its receivables.
However, if the credit period o ered is say 60 days, then you may nd signi cant
amount of previous accounts receivables on the balance sheet, which obviously is
not good from company’s point of view.
Days Receivables – Colgate Case Study Example
Let’s calculate Days Receivables for Colgate. To calculate Days Receivables, we have
taken 365 days assumption.
Since, we had already calculated receivables turnover above, we can easily calculate
the days receivables now.Days receivables or Average Receivables collection days
has decreased from around 40 days in 2008 to 34 days in 2015.
This means that Colgate is doing a better job in collecting its receivables. They may
have started implementing a stricter credit policy.
#6 – Inventory Turnover Ratio analysis
What is Inventory Turnover Ratio analysis?

Inventory Ratio means how many times the inventories are restored during the year. It
can be calculated by taking Cost of Goods Sold and dividing by
Inventory.Inventory Turnover Formula = Cost of Goods Sold / Inventory
Let us take a simple Inventory Turnover Ratio Calculation example.
Cost of Goods Sold = $500

Inventory = $100
Inventory Turnover Ratio = $500 / $100 = 5.0x
This implies that during the year, inventory is used up 5 times and is restored to its
original levels.
You may note that when we calculate receivables turnover, we took Sales (Credit Sales),
however, in inventory turnover ratio, we took Cost of Goods Sold. Why?
The reason is that when we think about receivables, it directly comes from Sales made
on the credit basis. However, Cost of Goods sold is directly related to inventory and is
carried on the balance sheet at cost.
To get an intuitive understanding of this, you may see the BASE equation.
B+A=S+E
B = Beginning Inventory
A = Addition to Inventory (purchases during the year)
S = Cost of Goods sold
E = Ending Inventory
S =B+A–E
As we note from the above equation, Inventory is directly related to Cost of Goods Sold.
Inventory Turnover Ratio – Colgate Case Study Example
Let us calculate Inventory Turnover Ratio of Colgate. Like in receivables turnover,

we take the average inventory for calculating Inventory Turnovers.
Colgate’s inventory consists of Raw material and supplies, work in progress and
nished goods.
Colgate’s inventory turnover has been in the range of 5x-6x.

In the last 3 years, Colgate has seen a lower inventory turnover ratio. This means
that Colgate is taking longer to process its inventory to nished goods.
#7 – Days Inventory
What is Days Inventory?

We calculated Inventory Turnover Ratio earlier. However, most analyst prefer
calculating inventory days. This is obviously the same information but more intuitive.
Think of Inventory Days as the approximate number of days it takes for inventory to
convert into nished product.
Inventory Days Formula = Number of days in a year / Inventory Turnover.

Let us take a simple Days Inventory Calculation example. We will use
the previous example of Inventory Turnover Ratio and calculate Inventory Days.

Inventory = $100
Inventory Turnover Ratio = $500 / $100 = 5.0x
Inventory Days = 365/5 = 73 days.
This implies that Inventory is used up every 73 days on an average and is restored to its
original levels.
You may also think of inventory days as the number of days a company can
continue with production without replenishing its inventory.
One should also look at the seasonality patter in how inventory is consumed
depending on the demand. It is rare that inventory is consumed constantly
throughout the year.
Inventory Days – Colgate Case Study Example
Let us calculate the Inventory turnover days for Colgate. Inventory Days for Colgate =
365 / Inventory Turnover.
We see that inventory processing period has increased from 64.5 days in 2008 to
around 70.5 days in 2015.
This implies that Colgate is processing its inventory a bit slowly as compared
to 2008.
#8 – Accounts Payable Turnover
What is Accounts Payable Turnover?

Payables turnover indicates the number of times that payables are rotated during the
period. It is best measured against purchases, since purchases generate accounts payable.
Payables Turnover Formula = Purchases / Accounts Payables

Let us take a simple Accounts Payable Turnover calculation example. From the Balance
Sheet, you are provided with the following –
Ending Inventory = $500

Beginning Inventory = $200
Accounts Payable = $200
In this example, we need to rst nd out Purchases during the year. If you remember
the BASE equation that we used earlier, we can easily nd purchases.
B+A=S+E
B = Beginning Inventory
A = Additions or Purchases during the year
S = COGS
E = Ending Inventory
we get, A = S + E – B
Purchases or A = $500 + $500 – $200 = $800
Payables Turnover = $800 / $200 = 4.0x
Some analysts make a mistake of taking Cost of Goods Sold in the numerator of this
accounts payable turnover formula.
It is important to note here that Purchase is the one that leads to Payables.
We earlier saw Sales can be Cash Sales and Credit sales. Likewise, Purchases can be
Cash Purchases as well Credit Purchases. Cash Purchases does not
results in payables, it is only the Credit Purchases that leads to Accounts payables.
Ideally, we should seek for Credit Purchases information from the annual report.
Accounts Payable Turnover – Colgate Case Study Example

In Colgate’s case study, we rst nd the Purchases. Purchases 2015 = COGS 2015 +
Inventory 2015 – Inventory 2014 Once we have the purchases, we can now nd the
payables turnover. Please note that we use the average accounts payable to calculate the
ratio. We note that Payable turnover has decreased to 5.50x in 2015. This implies that
Colgate is taking a bit longer to make payment to its suppliers.
#9 – Days Payable Ratio Analysis
What is Days Payable Ratio analysis?

Like with all the other turnover ratios, most analyst prefer to calculate much intuitive
Days payable. Payable days represent the average number of days a company takes to
make the payment to its suppliers.
Payables Days Formula = Number of Days in a year / Payables Turnover

Let’s take a simple Payable Days calculation example. We will use the previous example
of Accounts Payable Turnover to nd the Payable days
We earlier calculated Accounts Payable Turnover as 4.0x

Payable Days = 365 / 4 = 91.25 ~ 91 days
This implies that the company pays its clients every 91 days.
Higher the accounts payable days, better it is for the company from liquidity point
of view.
Payable days can be a ected by seasonality in the business. Sometimes business
may stock inventories due to upcoming business cycle. This may distort the
interpretations that we make on payable days if we are not aware of seasonality.
Accounts Payable Ratio Analysis – Colgate Case Study Example

Let us calculate Accounts Payable for Colgate. Since, we have already calculated the
Payables Turnover, we can calculate Payable days = 365/Payables Turnover. Payable days
have been constant at around 66 days for the past 3 years. This means that Colgate takes
around 66 days for paying its suppliers.
#10 – Cash Conversion Cycle
What is Cash Conversion Cycle?

Cash conversion cycle is the total time taken by the rm to convert its cash out ows
into cash in ows (returns). Think of Cash Conversion Cycle as time taken by a company
to purchase the raw materials, then convert inventory into nished product and sell the
product and receive cash and then make the necessary payout for the purchases.
Cash Conversion cycle depends primarily on three variables – Receivable Days,

Inventory Days and Payable Days.
Cash Conversion Cycle Formula = Receivable Days + Inventory Days – Payable Days
Let us take a simple Cash Conversion Cycle calculation example,
Receivable Days = 100 days

Inventory Days = 60 days
Payable Days = 30 days
Cash conversion cycle = 100 + 60 – 30 = 130 days.
Analyst Interpretation of Cash Conversion
It signi es the number of days rm’s cash is stuck in the operations of the business.
Higher cash conversion cycle means that it takes longer time for the rm to
generate cash returns.
However, a lower cash conversion cycle may be viewed as a healthy company.
Also, one should compare the cash conversion cycle with the industry averages so
that we are in a better position to comment on higher/lower side of cash
conversion cycle.
Cash Conversion Cycle – Colgate Case Study Example
Cash Conversion Cycle of colgate = Receivable Days + Inventory Days – Payable

Days
Overall, we note that the cash collection cycle has decreased from around 46 days
in 2008 to 38 days in 2015.
This implies that overall Colgate is improving its cash conversion cycle with each
year.
We note that the receivables collection period has decreased overall that has
contributed to the decrease in cash conversion cycle.
Additionally, we also note that the average payable days has increased, which again
positively contributed to the cash conversion cycle.
However, the increase in inventory processing days in the recent years has
negatively a ected its cash conversion cycle.
Ratio Analysis of nancial statement – Operating

Performance
Operating performance ratios try and measure how the business is performing at the
ground level and is su ciency generating returns relative to the assets deployed.
Operating Performance Ratios are two sub-divided as per the diagram below
Operating E ciency Ratios
#11 – Asset Turnover Ratio analysis
What is Asset Turnover Ratio analysis?

The asset turnover ratio is a comparison of sales to total assets. This ratio provides with
an indication on how e ciently the assets are being utilized to generate sales.
Asset Turnover ratio Formula = Total Sales / Assets

Let us take a simple Cash Conversion Cycle calculation example.
Sales of Company A = $900 million

Total Assets = $1.8 billion
Asset Turnover = $900/$1800 = 0.5x
This implies that for every $1 of assets, the company is generating $0.5
Asset turnovers can be extremely low or very high depending on the Industry they
operate in.
Asset turnover of Manufacturing rm will be on the lower side due to large asset
base as compared to a companies that operates in the services sector (lower assets).
If the rm has seen considerable growth in assets during the year or the growth has
been seasonal, then the analyst should nd additional information to interpret such
numbers.
Asset Turnover Ratio analysis – Colgate Case Study Example

Asset Turnover of Colgate = Sales / Average Assets
We note that the Asset Turnover for Colgate is showing a declining trend. Asset turnover
was at 1.53x in 2008, however, each year this ratio has sequentially decreased (1.26x in
2015).
#12 – Net Fixed Asset Turnover
What is Net Fixed Asset Turnover?

Net Fixed Asset turnover re ects utilization of xed assets (Property Plant and
Equipment).
Net Fixed Asset Turnover Formula = Total Sales / Net Fixed Assets
Let us take a simple Net Fixed Asset Turnover calculation example.
Total Sales = $600

Net Fixed Assets = $600
Net Fixed Asset Turnover = $600 / $600 = 1.0x
This implies that for every $ spent on the xed assets, the company is able to generate
$1.0 in revenues.
This ratio should be applied to high capital intensive sectors like Automobile,
Manufacturing, Metals etc.
You should not apply this ratio to asset light companies like Services or Internet
based as the Net Fixed assets will be really low and not meaningful from analysis
point of view.
This number can look temporarily bad if the rm has recently added greatly to its
capacity in anticipation of future sales
Net Fixed Asset Turnover – Colgate Case Study Example

Net Fixed Asset Turnover of Colgate = Sales / Average Net Fixed Assets (PPE, net)
Like the Asset Turnover, Net Fixed asset turnover is also showing a declining trend.
Net Fixed Asset turnover was at 5.0x in 2008, however, this ratio has reduced to 4.07x in
2015.
#13 – Equity Turnover
What is Equity Turnover?

Equity turnover is the ratio of Total Revenue to the Shareholder’s Equity Capital. This
ratio measures how e ciency the company is deploying equity to generate sales.
Equity Turnover Ratio Formula = Total Sales / Shareholder’s Equity

Let us take a simple Equity Turnover calculation example,
Total Sales = $600

Shareholder’s Equity = $300
Equity Turnover Ratio = $600 / $300 = 2.0x.
This implies that company is generating $2.0 of sales for every $1.0 of shareholder’s
equity.
Equity Turnover – Colgate Case Study Example

Colgate Equity Turnover = Sales / average Shareholder’s Equity We note that historically,
Colgate’s Equity Turnover has been in the range of 6x-7x. However, it jumped to 37.91x
in 2015.
This was primarily due to two reasons – a) Share buy back program of Colgate resulting
in lowering of Equity base each year. b) Accumulated losses net of taxes (these are those
losses that don’t ow into the income statement).
Operating Pro tability Ratios

Operating Performance Ratios measure how much are the costs relative to the sales and
how much pro t is generated in the overall business. We try to answer questions like
“how much the pro t percentage” or “Is the rm controlling its expenses by buying
inventory etc at a reasonable price?”
#14 – Gross Pro t Margin
What is Gross Pro t Margin?

Gross Pro t is the di erence between Sales and the direct cost of making a product or
providing service. Please note that costs like overheads, taxes, interests are not deducted
here.
Gross Margin Formula = (Sales – Costs of Goods Sold)/Sales = Gross Pro t / Sales
Let us take a simple Gross Margin calculation example,
Assume from the Sales of a rm is $1,000 ands its COGS is $600

Gross Pro t = $1000 – $600 = $400
Gross Pro t Margin = $400/$1000 = 40%
Gross Margin can vary drastically between industries. For example, digital products
sold online will have extremely high Gross Margin as compared to a company that
sells Laptop.
Gross margin is extremely useful when we look at the historical trends in the
margins. If the Gross Margins has increased historically, then it could be either
because of price increase or control of direct costs. However, if the Gross margins
show a declining trend, then it may be because of increased competitiveness and
therefore resulting in decreased sales price.
In some companies, Depreciation expenses are also included in Direct Costs. This
is incorrect and should be shown below the Gross Pro t in the Income Statement.
Gross Margins – Colgate Case Study Example

Let us calculate Colgate’s Gross Margin. Colgate’s Gross Margin = Gross Pro t / Net
Sales.
Please note that depreciation related to manufacturing operations are included here in
Cost of Operations (Colgate 10K 2015, pg 63)
Shipping and handling costs may be reported either in Cost of Sales or Selling General
and Admin Expenses. Colgate has however, reported these costs as a part of Selling
General and Admin Expenses. If such expenses are included in Cost of Sales, then the
Gross margin of colgate would have decreased by 770 bps from 58.6% to 50.9% and
decreased by 770bps and 750 bps in 2014 and 2013 respectively. source: – Colgate 10K
2015, pg 46
#15 – Operating Pro t Margin
What is Operating Pro t Margin?

Operating pro t or Earnings Before Interest and Taxes (EBIT) margin measures the rate
of pro t on sales after operating expenses. Operating income can be thought of as the
“bottom line” from operations.Operating Pro t Margin = EBIT / Sales
Let us take a simple Operating Pro t Margin calculation example,
We will use the previous example.

Assume from the Sales of a rm is $1,000 ands its COGS is $600
SG&A expense = $100
Depreciation and Amortization = $50
EBIT = Gross Pro t – SG&A – D&A = $400 – $100 – $50 = $250
EBIT Margin = $250/$1000 = 25%
Please note that some analyst take EBITDA (Earning before interest taxes
depreciation and amortization) instead of EBIT as Operating Pro t. If this is so,
they assume that depreciation and amortization are non-operating expenses.
Most analyst prefer taking EBIT as Operating Pro t. Operating Pro t Margin is
most commonly tracked by analysts
You need to be mindful of the fact that many companies include non recurring
items (gains/losses) in SG&A or other expenses above EBIT. This may increase or
decrease the EBIT Margins and skew your historical analysis.
Operating Pro t Margin – Colgate Case Study Example
Colgate’s Operating Pro t = EBIT / Net Sales
Historically, Colgate’s Operating Pro t has remained in the range of 20%-23%

However, in 2015, Colgate’s EBIT Margin decreased signi cantly to 17.4%. This was
primarily due to change in accounting terms for CP Venezuela entity (as explained
below)
Colgate derives more than 75% income from outside of United States. The company
is exposed to changes in economic conditions, exchange rates volatilities
and political uncertainty in some countries.
Once such country has been Venezuela, where operating environment has been
very challenging for Colgate and economic uncertainty due to wide exchange
rate devaluations. Additionally, due to price controls, Colgate has restricted ability
to implement price increases without governmental approval.
Colgate’s ability to generate income continue to be negatively a ected by these
di cult geo-political conditions.
As a result, e ective from December 31st, 2015, Colgate is no longer including the
results of CP Venezuela in its consolidated income statement and began accounting
of its CP Venezuela entity using Cost method of accounting. As a result, the
company has taken pre-tax charge of $1.084 billion in 2015.
This has resulting in decrease of Operating Margin of Colgate in 2015.
#16 – Net Margin
What is Net Margin?

Net Margin is basically the net e ect of operating as well as nancing decisions taken by
the company. It is call as Net Margin because in the numerator we have Net Income (Net
of all the operating expenses, interest expenses as well as taxes)
Net Margin Formula = Net Income / Sales

Let us take a simple Net Margin calculation example, Continuing with our previous
example, EBIT = $250, Sales = $1000.
We now assume that interest is $100 and taxes is charges at the rate of 30%.EBIT = $250
Interest = $100
EBT = $150
Taxes = $45
Net Pro t = $105
Net Pro t Margin = $105/$1000 = 10.5%
Like Gross margins, Net Margins can also vary drastically across industries. For
example Retail is a very low margin business (~5%) whereas a website selling digital
products may have Net Pro t Margin in excess of 40%.
Net Margins is useful for comparison between companies within the same industry
due to similar product and cost structure.
Net Pro t Margins can vary historically due to presence of non recurring items or
non operating items.
Net Margin – Colgate Case Study Example

Let us have a look at the Net Margin of Colgate.
Historically, Net Margin for Colgate has been in the range of 12.5% – 15%.
However, it decreased substantially in 2015 to 8.6% primarily due to CP Venezuela
Accounting changes (reasons described in EBIT margin discussion).
#17 – Return on Total Assets
What is Return on Total Assets?

Return on Assets or Return on Total Assets relates to the rm’s earnings to all capital
invested in the business.
Two important things to note there –
Please note that in the denominator, we have Total Assets which basically takes care
of both the Debt and Equity Holders.
Likewise in the numerator, the Earnings should re ect something that is before the
payment of interest.
Return on Total Asset Formula = EBIT / Total Assets.

Let us take a simple Return on Total example,
Company A has an EBIT of $500 and Total Assets = $2000

Return on Total Assets = $500/$2000 = 25%
This implies that the company is generating a Return on Total Assets of 25%.
Many analysts use the numerator as Net Income + Interest Expenses instead of
EBIT. They basically are deducting the taxes.
Return on Assets can be low or high depending on the type of industry. If the
company operates in a capital intensive sector (Asset heavy), then the return on
assets may be on the lower side. However, if the company is Asset Light (services or
internet company), they tend to have have a higher Return on Assets.
Return on Total Assets – Colgate’s Case Study Example

Let us now calculate the Return on total Assets of Colgate. Colgate’s Return On Total
Assets = EBIT / Average total assets Colgate’s Return on total assets have been declining
since 2010. Most recently, it has declined to its lowest to 21.9%. Why?
Let’s investigate….
Two reasons can contribute to decrease – either the denominator i.e. average assets have
increased signi cantly or the Numerator Net Sales have dropped signi cantly.
In Colgate’s case, the total assets have infact decreased in 2015. This leaves us to look at
the Net Sales gure.
We note that the overall Net sales has decreased by as much as 7% in 2015. We note that
the primary reason for sales decrease for the negative impact due to foreign exchange of
11.5%.
Organic sales of colgate has however increased by 5% in 2015.
#18 – Return on Total Equity
What is Return on total Equity?

Return on Total Equity means the rate of return earned on the Total Equity of the rm.
Can be thought of dollar pro ts a company generates on each dollar investment of Total
Equity.Please note Total Equity = Ordinary Capital + Reserves + Preference +
MinorityInterests
Return on Total Equity Formula = Net Income / Total Equity

Let us take a simple Return on Total Equity example.
Net Income = $50

Total Equity = $500
Return on Total Equity = $50/$500 = 10%
Return on total equity is 10%
Please note that the Net income will be before the preference dividends and
minority interest are paid.
Higher Return on Total Equity implies higher return to the Stakeholders.
Return on Total Equity – Colgate Case Study Example
Colgate’s Return on Total Equity = Net Income (before pref dividends & minority
interest) / average total equity.
Please do remember to take the Net income before minority interest payments in
colgate. This is because we are using the total equity (including the non controlling
assets).
We note that the Return on Total Equity has jumped to 230.9%. This is despite the
fact that the Net Income has decreased 34% in 2015.
This result is somehow not making much sense here and cannot be interpreted as
the Return On total Equity that will continue in the future.
Return on Total Equity has jumped primarily due to decrease in denominator –

Shareholder’s equity (increase in treasury stock because of buy back and also
because of accumulated losses that ow through the Shareholder’s Equity)
#19 – Return on Equity or Return on Owner’s Equity
What is ROE?
Return on equity or Return on Owner’s Equity is based only on the common
shareholder’s equity. Preferred dividends and minority interests are deducted from Net
Income as they are a priority claim.Return on equity provides us with the Rate of return
earned on the Common Shareholder’s Equity.
ROE or Return on Equity Formula = Net Income (after pref dividends and minority
interest) / Common Shareholder’s Equity
Let us take a simple ROE calculation example,
Net Income = $50

Total Equity = $500
ROE (owners) = $50 / $400 = 12.5%
ROE of the company is 12.5%
ROE Calculation – Colgate Case Study Example
Like the Return on Total Equity, Return on Equity has jumped signi cantly to 327.2% in
2015.
This has happened despite 34% decrease in the Net Income in 2015.
Return on Equity also jumped because of the decrease in Shareholder’s Equity because
of the much lower base in 2015. (reasons as discussed earlier in Return on Total Equity).
#20 – Dupont ROE
What is Dupont ROE?

Dupont ROE is nothing but an extended way of writing an ROE formula. It divides ROE
into several ratios that collectively equal ROE while individually providing insight to
most important term in ratio analysis of nancial statement
Dupont ROE formula

= (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Shareholder’s Equity)
The above formula is nothing but the ROE formula = Net Income / Shareholder’s Equity
Let us take a simple Dupont ROE calculation example.
Net Income = $50

Sales = $500
Total Assets = $200
Gross Margin = Net Income / Sales = $50 / $500 = 10%
Asset Turnover = Sales / Total Assets = $500/$200 = 2.5x
Asset Leverage = Total Asset / Shareholder’s Equity = $200 / $400 = 0.5
Dupont ROE = 10% x 2.5 x 0.5 = 12.5%
Dupont ROE formula provides with additional ways to analyze the ROE ratio and
helps us nd out reason to the nal number.
The rst term (Net Income/Sales) is nothing but the Net Pro t Margin. We know
that Retail sector operates on low pro t margin, however, software product based
company may operating on high pro t margin.
The second term here is (Sales/Total Assets), we normally call this term as Asset
turnovers. It provides us with a measure of how e ciently the assets are being
utilized.
The third term here is (Total Assets / Shareholder’s Equity), we call this ratio as
Asset Leverage. Asset leverage gives insight into how the company may be able to
nance the purchase of new assets. A higher Asset leverage does not mean that it is
better than the low multiplier. We need to look at the nancial health of the
company by performing full ratio analysis of nancial statement.
Dupont ROE – Colgate Case Study Example

Colgate Dupont ROE = (Net Income / Sales) x (Sales / Total Assets) x (Total Assets /
Shareholder’s Equity)
Please note that the Net Income is after the minority shareholder’s payment.
Also, the shareholder’s equity consists of only the common shareholder’s of Colgate. We
note that the asset turnover has shown a declining trend over the past 7-8 years.
Pro tability has also declined over the past 5-6 years
However, ROE has not shown a declining trend. It is increasing overall. This is because
of the Financial Leverage (average total assets / average total equity). You will note that
the Financial Leverage has shown a stead increase over the past 5 years and is currently
standing at 30x.
Ratio Analysis of nancial statement – Risk
Risk analysis examines the uncertainty of income for the rm and for an investor
Total rm risks can be decomposed into three basic sources – 1) Business risk 2)
Financial
Risk 3) External Liquidity Risk
Business Risk
Wikipdedia de nes as “the possibility a company will have lower than anticipated
pro ts or experience a loss rather than taking a pro t”. If you look at the income
statement, there are many line items that contribute to the risk of making losses. In this
context, we discus three kinds of business risks – Total Leverage, Operating leverage and
Financial Leverage.
# 21. Operating Leverage
What is Operating Leverage?
Operating leverage is the percentage change in operating pro t relative to

sales.Operating leverage is a measure of how sensitive the operating income is to the
change in revenues.
Please note that greater use of xed costs, greater the impact of a change in sales on the
operating income of a company.
Operating Leverage Formula = % change in EBIT / % change in Sales.
Let us take a simple Operating Leverage calculation example.
Sales 2015 = $500, EBIT 2015 = $200

Sales 2014 = $400, EBIT 2014 = $150
% change in EBIT = ($200-$150)/$100 = 50%
% change in Sales = ($500-$400)/$400 = 25%
Operating Leverage = 50/25 = 2.0x
This means that for Operating pro t changes by 2% for every 1% change in Sales.
Greater the xed costs, higher is the operating leverage.

Between ve to ten years of data should be used for calculating Operating Leverages
Operating Leverage – Colgate Case Study Example
Colgate’s Operating Leverage = % change in EBIT / % change in Sales

I have calculated the operating leverages for each year from 2008 – 2015.
Colgate’s operating leverage is very volatile as it ranges from 1x to 5x (excluding the
year of 2009 where sales growth was almost 0%).
It is expected that Colgate’s Operating leverage to be higher as we note that Colgate
has made signi cant investments in Property, plant and equipment as well as
intangible assets. Both these long term assets account for more than 40% of the total
assets.
# 22. Financial Leverage
What is Financial leverage?

Financial leverage is the percentage change in Net pro t relative to Operating
Pro t. Financial leverage measures how sensitive the Net Income is to the change in
Operating Income.Financial leverage primarily originates from company’s nancing
decisions (usage of debt). Like in the operating leverage, xed assets leads to higher
operating leverage. In Financial leverage, the usage of debt primarily increases the
nancial risk as they need to payo interest
Financial Leverage formula = % change in Net Income / % change in EBIT

Let us take a simple Financial Leverage calculation example,
Net Income 2015 = $120, EBIT 2015 = $200

Net Income 2014 = $40, EBIT 2014 = $150
% change in EBIT = ($200-$150)/$100 = 50%
% change in Net Income = ($120-$40)/$40 = 200%

Financial Leverage = 200/50 = 4.0x
This means that for Net Income changes by 4% for every 1% change in Operating Pro t.
Greater the Debt, higher is the Financial leverage.

Between ve to ten years of data should be used for calculating Financial Leverages
# 23. Total Leverage
What is Total Leverage?

Total leverage is the percentage change in Net pro t relative to its Sales. Total leverage
measures how sensitive the Net Income is to the change in Sales.
Total Leverage Formula = % change in Net Pro t / % change in Sales

= Operating Leverage x Financial Leverage
Let us take a simple Total Leverage calculation example,
Sales 2015 = $500, EBIT 2015 = $200, Net Income 2015 = $120
Sales 2014 = $400, EBIT 2014 = $150, Net Income 2014 = $40
% change in Sales = ($500-$400)/$400 = 25%
% change in EBIT = ($200-$150)/$100 = 50%
% change in Net Income = ($120-$40)/$40 = 200%
Total Leverage = % change in Net Income / % change in Sales =200/25 = 8x.
Total Leverage = Operating Leverage x Financial Leverage = 2 x 4 = 8x (Operating and
Financial Leverage calculated earlier)
This implies for every 1% change in Sales, the Net Pro t moves by 8%.
Higher sensitivity could be because of higher operating leverage (higher xed cost) and
higher nancial leverage (higher debt)5-10 years of data should be taken to calculate the
total leverage.
Total Leverage – Colgate Case Study Example

Let us now look at the Total Leverage of Colgate.
Colgate’s Operating leverage is higher as we note that Colgate has made signi cant
investments in Property, plant and equipment as well as intangible assets.
However, Colgate’s Financial Leverage is pretty stable.
Financial Risk
Financial risk is the type of risk primarily associated with the risk of default on the
company loan. We discuss 3 types of nancial risk ratios – Leverage Ratio, Interest
Coverage Ratio and DSCR ratio.
# – 24. Leverage Ratio or Debt to Equity Ratio
What is Leverage Ratio?

How much debt does the rm employ in relation to its use of equity? This is an
important ratio for bankers as it provides company’s ability to pay o debt using its own
capital. Generally lower the ratio better it is.Debt includes current debt + long term debt
Leverage Ratio Formula = Total Debt (current + long term) / Shareholder’s Equity
Let us take a simple Leverage Ratio calculation example.
Current Debt = $100

Long Term Debt = $900
Leverage Ratio = ($100 + $900) / $500 = 2.0x
Leverage Ratio – Colgate Case Study Example

Leverage Ratio of Colgate = (Current portion of long term debt + Long term Debt) /
Shareholder’s Equity. We note that the leverage ratio has been increasing since 2009. The
Debt to Equity has increased from 0.98x in 2009 to 4.44x in 2014. Also, please note that
the Equity Capital for 2015 was negative and hence, the ratio was not calculated.
We note that the Debt Ratio in 2014 was at 0.80.
Leverage ratio has been increasing due to two reasons –

Shareholder’s equity is decreasing steadily over the years due to buy back of shares as
well as accumulated losses that ow to the Shareholder’s Equity.
Additionally, we note that Colgate has been systematically increasing debt to support its
capital structure strategy objectives to funds its business and growth initiatives, as well
as to minimize its risk adjust weighted average cost of capital. Colgate 10K, 2015 (pg 41)
# 25. Interest Coverage Ratio
What is Interest Coverage Ratio?

This ratio signi es the ability of the rm to pay interest on the assumed debt.
Interest Coverage Formula = EBITDA / Interest Expense

Please note that EBITDA = EBIT + Depreciation & Amortization
Let us take a simple Interest Coverage Ratio calculation example,
EBIT = $500
Depreciation and Amortization = $100
Interest Expense = $50
EBITDA = $500 + $100 = $600
Interest Coverage Ratio = $600 / $50 = 12.0x
Interest Coverage Ratio – Colgate Case Study Example

Colgate’s Interest Coverage Ratio = EBITDA / Interest Expense.
Please note that depreciation and amortization expenses are not provided in the income
statement. These were taken from the Cash Flow statements.
Also, Interest expense shown in the Income Statement is the net number (Interest
Expense – Interest Income) Colgate has a very healthy Interest coverage ratio. More than
100x in the past two years.
We also note that in 2013, the Net Interest Expense was negative. Hence the ratio was
not calculated.
# 26. Debt Service Coverage Ratio (DSCR)
What is DSCR?
Debt Service Coverage Ratio tells us whether the Operating Income is su cient to
payo all obligations that are related to debt in an year. It also includes committed lease
payments.Debt servicing consists of not only the interest, but also some principal
portion also is repaid annually.
Debt Service Coverage Formula = Operating Income / Debt Service

Operating Income is nothing but EBIT
Debt Service is Principal Payments + Interest Payments + Lease Payments
Let us take a simple DSCR calculation example,
EBIT = $500
Pricipal Payment = $125
Interest Payment = $50
Lease Payments = $25
Debt Service = $125 + $50 + %25 = $200
DSCR = EBIT / Debt Service = $500/$200 = 2.5x
DSCR – Colgate’s Case Study Example

Colgate’s Debt Service Coverage Ratio = Operating Income / Debt Service
Debt Service = Principal Repayment of Debt + Interest Payment + Lease Obligations
For Colgate, we get the Debt service obligations from its 10K reports. Colgate 10K 2015,
pg 43.
Please note that you get the forecast of the Debt Service in the 10K reports.
For nding out the historical Debt Service Payments, you need to refer to the 10Ks prior
to 2015. As noted from the graph below, we see that the Debt Service Coverage Ratio or
DSCR for Colgate is health at around 2.78.
However, the DSCR has deteriorated a bit in the recent past.
You can click here for a detailed indepth article on DSCR Ratio
Ratio Analysis of nancial statement – External Liquidity Risk
#27 – Bid Ask Spread
What is Bid Ask Spread?

Bid – Ask Spread is a very important parameter that helps us understand how the stock
prices gets a ected with purchase or sale of stocks. Bid is the highest price that the
buyer is willing to pay
Ask is the lowest price at which the seller is willing to sell.
Let us take a simple Bid Ask Spread calculation example.
If the bid price is $75 and the ask price is $80, then the bid-ask spread is the the
di erence between the ask price and the bid price.$80 – $75 = $5.
External market liquidity is an important source of risk to investors.

If the bid-ask spread is low, then the investors are able to buy or sell assets with
little price changes.
Also, another factor of external market liquidity is the dollar value of shares traded
External Liquidity Risk – Colgate Case Study Example

Let us look at Colgate Bid Ask Spread.
As we note from the below snapshot, Bid = 74.12 and Ask = $74.35
Bid Ask Spread = 74.35 – 74.12 = 0.23
source : Yahoo Finance
#28 – Trading Volume
What is Trading Volume?

Trading volume refers to the average number of shares traded in a day or over a period
of time. When the average trading volume is high, this implies that the stock has high
liquidity (can be easily traded). Numerous buyers and sellers provide liquidity.
Let us take a simple Trading Volume example.
There are two companies – Company A and B.

Average daily traded volume of Company A is 1000 and that of Company B is 1 million.
Which company is more liquid? Obviously company B as there is more investors
interest and traded more.
If the trading volume is high, then investors will show more interest in the stock
that may help in increase of the share price.
If the trading volume is low, then less investors will have interest in the stocks.
Such stock will be less expensive due to unwillingness of investors to buy such
stocks.
Trading Volume – Colgate’s Case Study Example

Let us look at the trading volume of Colgate. We note from the below table that
Colgate traded volume was at around 1.85 million shares. This is fairly liquid stock.
source: investing.com

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Ratio Analysis of Financial Statements

I want to Learn Ratio Analysis Types

I want to learn the following

Ratio Analysis / Financial Statement Analysis – Read me First

Step 4 – Happy Learning!

Ratio Analysis of nancial statement

What is Financial Statement Analysis / Ratio Analysis?

Although nancial statement information is historical, it is used to project future

Vertical Analysis (also called as Common Size Statements Analysis) – It compares

Let us look at each one of them one by one.

Ratio Analysis of Financial Statements

Solvency Ratio Analysis

We will discuss each sub category one by one.

1. Current ratio analysis

#1 – Current Ratio Analysis

What is Current Ratio Analysis?

Current Ratio Formula = Current Assets / Current Liabilities

Current Assets = $200 Current Liabilities = $100

Analyst Interpretation of Current Ratio

Current Ratio analysis – Colgate Case Study Example

source: Colgate 2015 10K Report, Pg – 100

Below is a quick comparison of Current Ratio of Colgate’s vs P&G vs Unilever

#2 – Quick Ratio Analysis

What is Quick Ratio?

Sometimes current assets may contain huge amounts of inventory, prepaid

This ratio is know as Quick Ratio or the Acid Test.

Quick Ratio Formula = (Cash and Cash Equivalents + Accounts Receivables)/Current

Cash and Cash Equivalents = $100

Accounts Receivables are more liquid than the inventories.

Quick Ratio analysis – Colgate Case Study Example

#3 – Cash Ratio analysis

What is Cash Ratio analysis?

Cash Ratio Formula = Cash & Cash equivalents / Current Liabilities

Cash and Cash Equivalents = $500

Cash Ratio – Colgate Case Study Example

Turnover Ratio Analysis of nancial statement

The commonly used turnover ratios include:

#4 – Receivables Turnover Ratio analysis

What is Receivables Turnover Ratio analysis?

Accounts Receivables Turnover Ratio can be calculated by dividing Credit Sales by

Receivables Turnover Formula = Credit Sales / Accounts Receivables

Credit Sales = 80% of $1000 = $800

Accounts Receivables – Colgate Example

To calculate the receivables turnover, we have considered average receivables. We

Below is a quick comparison of Receivables turnover of Colgate vs P&G vs Unilever

What is Days Receivables?

Let us take a simple Days Receivables Calculation example,

Accounts Receivables Turnover = 4.0x

Days Receivables – Colgate Case Study Example

#6 – Inventory Turnover Ratio analysis

What is Inventory Turnover Ratio analysis?

Let us take a simple Inventory Turnover Ratio Calculation example.

Cost of Goods Sold = $500

A = Addition to Inventory (purchases during the year)

S = Cost of Goods sold

Inventory Turnover Ratio – Colgate Case Study Example

Let us calculate Inventory Turnover Ratio of Colgate. Like in receivables turnover,

Colgate’s inventory turnover has been in the range of 5x-6x.

What is Days Inventory?

Inventory Days Formula = Number of days in a year / Inventory Turnover.

Cost of Goods Sold = $500

Inventory Days – Colgate Case Study Example