We will look after the Ratio Analysis Meaning Formula.
Ratio Analysis Meaning Formula
Meaning
A ratio is an expression of relationship between two variables. Hence, ratio analysis is the analysis of various aspects of financial information in financial statement such as balance sheet, profit and loss account, etc. Moreover, it is gaining insight of company’s liquidity, operational efficiency, and profitability.
With the helps of ratios, inter company information can be compared and the management is helped in evaluating future market strategies. Hence, it helps in a general assessments of liquidity, solvency, profitability, and efficiency of the company. \
Purpose of Ratio Analysis
- To determine financial strength and weakness.
- For future planning and forecasting.
- To compare with industries average.
- To communicate financial positions.
Financial Ratios Formula
Following is the Financial Ratios Formula
1. Liquidity Ratios
a. Current Ratios: Current Assets / Current Liabilities
b. Quick Ratio: Quick Assets / Current Liabilities
2. Solvency/ Leverage Ratios
a. Debt Equity Ratio: Long term debt / Shareholders equity OR Total Debts / Shareholders equity
b. Debt to total Capital ratio: Long-term debt / Capital employed OR Total Debts / Total Capital
c. Interest Coverage ratio: Net profit before interest and taxes or EBIT / Interest
d. Fixed Coverage Ratio: Net profit before interest and taxes / Fixed Charges
3. Turnover Ratios:
a. Inventory turnover: Cost of good sold / Average inventory OR Net Sales / Closing Investory
b. Debtors turnover ratio: Net credit sales / Average debtors OR Total Sales (net) / Closing Debtors
c. Average Collection Period: Days in a year / Debtors turnover ratio
= (Days in year * Average debtors ) / Net Credit Sales
= (Days in a year * Closing Debtors ) / Net Sales
d. Fixed Assets turnover ratio: Net Sales / Net Fixed Assets
e. Total Assets turnover ratio: Net Sales / Total Assets OR
= Net Sales / Total Tangible assets
f. Capital employed turnover ratio: Net Sales / (Capital Employed or Permanent Capital )
4. Profitability Ratios:
a. Gross Profit Margin: ( Gross profit / Net Sales ) * 100
= [( Sales – Cost of Good Sold ) / Net Sales ] * 100
b. Net Profit margin : ( Net Profit after tax / Sales ) *100
c. Operating ratio: ( Operating expense / Net Sales ) * 100
d. Return on assets : [ ( Net profit after tax + Interest expense ) / Total Assets ] * 100
= ( Net Profit after tax / Total Assets ) * 100
= [ ( Net profit after tax + Interest ) / Total tangible assets ] * 1000
e. Return on shareholders equity: ( Net Profit after Tax / Shareholders equity ) * 100
f. Return on equity shareholders fund:
= ( Earning available to equity shareholder / Equity Shareholder fund ) * 100
g. Return on capital employed: [( Net profit after tax + Interest ) / Capital Employed ]
5. Other Ratios
a. Earning per share: [( Net profit after taxes – preference dividend) / No of common shares outstanding ]
b. Dividend per share: Dividend paid to equity shareholder / no of common shares outstanding
c. Dividend payout ratio: ( Dividend per share / Earning per share ) * 100
d. Dividend Yield Ratio: ( Dividend per share / Market price per share ) * 100
e. Earning yield ratio: ( Earning per share / Market value per share ) * 100
f. Price Earning ratio: ( Market value per share / Earning per share) * 100
g. Basic earning power ratio : ( Net profit before interest and tax / Total assets ) * 100
Hence, these are the financial ratios useful for financial analyst.
Other Important Links:
Benefits and Limitations of Ratio Analysis: CLICK HERE
