Different types of Financial Analysis Ratio ROA (return on asset) =
1) Profitability Ratios Operating income ÷ Total
a) Return on equity (ROE) assets b) Return on assets (ROA) c) Gross profit margin – c) Gross profit margin measures the ability of a d) Operating profit margin company to cover its cost of e) Net profit margin goods sold from its sales. Gross profit margin = Gross profit ÷ Sales 2) Liquidity Ratios d) Operating profit margin – a) Current Ratio measures the amount of b) Acid-Test Ratio or Quick Asset Ratio income generated from the core business of a company. 3) Leverage Ratios Operating profit margin = a) Debt Ratio Operating income ÷ Sales e) Net profit margin – b) Debt to Equity Ratio measures how much net profit c) Interest Coverage Ratio a company generates for every peso of sales or revenue that 4) Efficiency Ratios or Turnover Ratios generates. a) Total Asset Turnover Ratio Net profit margin = Net b) Fixed Asset Turnover Ratio income ÷ Sales c) Accounts Receivable Turnover Ratio d) Inventory Turnover Ratio e) Accounts Payable Turnover Ratio 2) Liquidity Ratios – measure the ability of a f) Operating Cycle company to pay maturing obligations from g) Cash Conversion Cycle its current assets. a) Current Ratio Current Ratio = Current Assets Different types of Financial Analysis Ratio ÷ Current Liabilities b) Acid-Test Ratio or Quick Asset Ratio 1) Profitability Ratios - Quick Asset Ratio = (Cash + a) Return on equity (ROE) – Current Accounts Receivable + is a profitability measure that Short-term Marketable should be of interest to stock market investors. It measures Securities) ÷ Current Liabilities the amount of net income earned in relation to 3) Leverage Ratios – show the capital structure stockholder’s equity. of a company, that is, how much of the ROE (return on equity) = total assets of a company is financed by Net income ÷ debt and how much is financed by Stockholders’ equity stockholders’ equity. Leverage ratios can b) Return on assets (ROA) – measures the ability of a also be used to measure the company’s company to generate income ability to meet long-term obligations. out of its resources. a) Debt Ratio Measures how much of the Fixed Asset Turnover Ratio = total assets are financed by Sales ÷ Property, Plant and liabilities. Equipment (PPE) Debt Ratio = Total Liabilities ÷ c) Accounts Receivable Turnover Ratio Total Assets Measures the efficiency by b) Debt to Equity Ratio which accounts receivable are A variation of the debt ratio. A managed. debt to equity ratio of more Accounts Receivable Turnover than one means that a Ratio = Sales ÷ Accounts company has more liabilities as Receivable compared to stockholders’ d) Inventory Turnover Ratio equity Measures the company’s Debt to Equity Ratio = Total efficiency in managing its Liabilities ÷ Total Stockholders’ inventories. Equity Inventory Turnover Ratio = Cost c) Interest Coverage Ratio of Sales ÷ Inventories Provides information if a e) Accounts Payable Turnover Ratio company has enough operating Provides information regarding income to cover interest the rate by which trade expense. payables are paid. Interest Coverage Ratio = Accounts Payable Turnover Earnings Before Interest and Ratio = Cost of Sales ÷ Trade Taxes (EBIT) ÷ Interest Expense Accounts Payable
4) Efficiency Ratios or Turnover Ratios – are f) Operating Cycle
called as such because they measure the Covers the period from the time management’s efficiency in utilizing the the merchandise is brought to assets of the company. the time the proceeds from the a) Total Asset Turnover Ratio sale are collected. Measures the company’s ability Operating Cycle = Days’ to generate revenues for every Inventories ÷ Day’s Receivable peso of asset invested g) Cash Conversion Cycle Asset Turnover Ratio = Sales ÷ Is inversely related to the Total Assets operating cash flows. If the cash b) Fixed Asset Turnover Ratio conversion cycle is low, expect If a company is heavily invested more operating cash flows and in property, plant and the reverse is true. equipment (PPE) or fixed Cash Conversion Cycle = assets, it pays to know how Operating Cycle – Days’ Payable efficient the management of these assets is.