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## What Is Ratio Analysis?

## The Bottom Line

## Financial Ratio Analysis: Definition, Types, Examples, and How to Use

Investopedia / Theresa Chiechi

## Key Takeaways

- Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency.
- Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
- Ratio analysis may also be required by external parties that set benchmarks often tied to risk.
- While ratios offer useful insight into a company, they should be paired with other metrics, to obtain a broader picture of a company's financial health.
- Examples of ratio analysis include current ratio, gross profit margin ratio, inventory turnover ratio.

## Ratio Analysis

What does ratio analysis tell you.

## Types of Ratio Analysis

## 1. Liquidity Ratios

## 2. Solvency Ratios

## 3. Profitability Ratios

## 4. Efficiency Ratios

## 5. Coverage Ratios

## 6. Market Prospect Ratios

## Application of Ratio Analysis

## Ratio Analysis Over Time

## Ratio Analysis Across Companies

## Ratio Analysis Against Benchmarks

## Examples of Ratio Analysis in Use

## What Are the Types of Ratio Analysis?

## What Are the Uses of Ratio Analysis?

## Why Is Ratio Analysis Important?

## What Is an Example of Ratio Analysis?

- Valuing a Company: Business Valuation Defined With 6 Methods 1 of 37
- What Is Valuation? 2 of 37
- Valuation Analysis 3 of 37
- Financial Statements: List of Types and How to Read Them 4 of 37
- Balance Sheet: Explanation, Components, and Examples 5 of 37
- Cash Flow Statement: How to Read and Understand It 6 of 37
- 6 Basic Financial Ratios and What They Reveal 7 of 37
- 5 Must-Have Metrics for Value Investors 8 of 37
- Earnings Per Share (EPS): What It Means and How to Calculate It 9 of 37
- P/E Ratio - Price-to-Earnings Ratio Formula, Meaning, and Examples 10 of 37
- Price-to-Book (PB) Ratio: Meaning, Formula, and Example 11 of 37
- Price/Earnings-to-Growth (PEG) Ratio: What It Is and the Formula 12 of 37
- Fundamental Analysis: Principles, Types, and How to Use It 13 of 37
- Absolute Value: Definition, Calculation Methods, Example 14 of 37
- Relative Valuation Model: Definition, Steps, and Types of Models 15 of 37
- Intrinsic Value of Stock: What It Is, Formulas To Calculate It 16 of 37
- Intrinsic Value vs. Current Market Value: What's the Difference? 17 of 37
- The Comparables Approach to Equity Valuation 18 of 37
- The 4 Basic Elements of Stock Value 19 of 37
- How to Become Your Own Stock Analyst 20 of 37
- Due Diligence in 10 Easy Steps 21 of 37
- Determining the Value of a Preferred Stock 22 of 37
- Qualitative Analysis 23 of 37
- How to Choose the Best Stock Valuation Method 24 of 37
- Bottom-Up Investing: Definition, Example, Vs. Top-Down 25 of 37
- Financial Ratio Analysis: Definition, Types, Examples, and How to Use 26 of 37
- What Book Value Means to Investors 27 of 37
- Liquidation Value: Definition, What's Excluded, and Example 28 of 37
- Market Capitalization: How Is It Calculated and What Does It Tell Investors? 29 of 37
- Discounted Cash Flow (DCF) Explained With Formula and Examples 30 of 37
- Enterprise Value (EV) Formula and What It Means 31 of 37
- How to Use Enterprise Value to Compare Companies 32 of 37
- How to Analyze Corporate Profit Margins 33 of 37
- Return on Equity (ROE) Calculation and What It Means 34 of 37
- Decoding DuPont Analysis 35 of 37
- How to Value Private Companies 36 of 37
- Valuing Startup Ventures 37 of 37

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- 1. ACCOUNTING RATIO ANALYSIS TO ASSESS THE ACCOUNTING SECTOR IN GALADARI HOTELS (LANKA) PLC. – FINANCIAL YEAR 2009/2010 – Accounting and Finance - Pgdbm 503 Assignment 1 Mohammed Muthalif Fathima Nasriya Registration No. 072 Postgraduate Diploma in Business Management Faculty of Graduate Studies University of Colombo Sri Lanka February 2014
- 2. 1. INTRODUCTION Business has never been as competitive as it stands today, there are witnessed the fall of many industry giants within the last decade than ever before. Industry experts and scholars put this down to many reasons, not forecasting or adapting to possible changers. Not been proactive enough but reactive are few to name. A major area which attracted the lime light was the ‘Accounting sector’ mainly many critics pointed out that the reason for ‘Financial Giant’ to collapse was due to lack of correct (Legal) and ethical accounting practices, reflecting their true financial picture/status to the public. Financial reports at a glance provide the ‘profit and loss’ stance of a company, but to get the maximum leverage or insight knowledge one should be able to ‘read between the lines’ in accounting terms in an annual report. This is the point where they can use the ‘ratio analysis’ as a vital tool. Not only to analyze the profit/ loss but many other important factors. Understanding the cost effectiveness, capital and liability structure in long term and short term perceptive, effectiveness of assets management, income turnover of assets, etc. They had many ideas and views to approach this task, to show the effectiveness of the ratio analysis and at the end commonly agreed to focus our study on the ‘Hotel / tourism Industry’ where we selected two major (five star) hotels holding companies and the year 2010 as the year to conduct the study, based on their annual reports. There were many reasons behind this selection, as 2010 was a historical year for all Sri Lankans in which we as a nation had to face the peak of the civil war and with a sign of relief saw the end to the 30 year hard fought civil war, three major elections, flood, initiation of major investments, increase in tourists, etc. In a country like Sri Lanka though the share market does not reflect the true picture of the business functions, we have been able to loop the business and financial fluctuations logically and strategically to reflect the original purpose of the study. I hope that this comprehensive and descriptive ratio analysis will be able to give an in-depth insight to the industry and much other functionality in a more coherent and an accountable manner.
- 3. 2. INTRODUCTION TO THE INDUSTRY Sri Lanka is well-known around the world as being an attractive destination for travel and tourism, offering a wide range of experiences. The sector is a significant contributor to national income and has emerged as the 4th highest foreign exchange earner in the country. Gross earnings from tourism stood at US $ 384 million in 2010 an increase of 12.3 percent over 2009 making itself as the fast emerging growth industry in the economy. Recently New York identified Sri Lanka as the number one destination out of 31 to visit in the world in year 2010. The Sri Lankan tourism sector is gearing up for increased arrivals and higher average daily expenditure per tourist. It is also focusing on increasing room capacity and generating additional direct employment. 3. COMPANY PROFILES GALADARI HOTELS (LANKA) PLC. Coroporate Structure The hotel Galadari is situated in the heart of Colombo's business district, and accomplishes with 450super luxury rooms, that overlooks the Indian Ocean and is adjacent to leading Banks and the World Trade Center, with easy access to the shopping areas in Colombo. The Galadari Hotels (Lanka) Plc. offers a rich blend of service and quality in five star luxury living. Hotel ensure and meticulous about maintaining the privacy of its guests has drawn in many an elite personality from around the world such as heads of government, prime ministers of leading nations, royalty, well known sports & music personalities over the past two and half decades. With a range of room and suite types, and a comprehensive list of facilities, the hotel is able to cater to the requirements of both business and family travelers, and is especially geared to handle the needs of Muslim clients, with Halal food in all restaurants.
- 4. 4. INTRODUCTION TO FINANCIAL ANALYSIS OF GALADARI HOTEL (LANKA) PLC. This study is for examine specific characteristics in the financial analysis of Galadari Hotels (Lanka) PLC. It is a listed company in the Colombo Stock Exchange (CSE). The analysis is based on the following selected areas to identify whether the company assessed and carrying out their financial activities up to standards and also to evaluate and analysis the financial strengths and weaknesses of a firms by establishing meaningful relationships between the elements of financial statements. Selected areas are as follows; Profitability Ratio Liquidity Ratio Solvency Ratio Activity Ratio Market Ratio The Galadari Hotel is mainly operated well in Hotel industry by showing negative last five years and 2010 positively performed. The analysis of financial operation evaluations in relevant to Sri Lankan Accounting Standards are carrying base on 2009-2010 financial year. The analysis has mainly focused on financial ratio analysis which are we discussed in the class to evaluate financial strengths and weaknesses of firms by establishing meaningful relationships between the elements of financial statements. 5. ACCOUNTING RATIO ANALYSIS “Ratio Analysis: is expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between on quantity and another. The relationship is expressed in terms of either a percentage, a rate or a simple proportion.” Few advantages and disadvantages of ratio analysis are listed below, 5.1 PROFITABILITY RATIOS Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line. Profitability ratios show a company's overall efficiency and performance. These measures indicate whether the company is performing satisfactorily. They are used to measure the Advantages of Ratio Analysis Limitations of Ratio Analysis Assist investors to make effective investment decision. Effect of price changes Facilitates inter-firm comparison Limitations of financial statements Assist organization planning and forecasting Comparative study required: Profitability Ratio measures the results of the organization operations, performance and effectiveness.
- 5. performance of the management, to identify whether a company may be a worthwhile investment opportunity and to determine a company’s Performance relative to its competitors. Classifications of profitability ratios 5.1.1. Gross Profit Ratio Gross Profit Ratio indicates the amount of earnings, required to pay fixed costs and profits, are generated from revenues. Indicates how much of each sales rupee is available to meet expenses and profits after merely paying for the goods that were sold of an organization. The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products or services and subsequently passes on the costs to its customers. The larger the gross profit margin, the better for the company. Formula: Gross Profit Ratio = Gross Profit X 100 Net Sales Calculation and comparison of Gross Profit Ratios for Galadari Holtel PLC. Year 2010 2009 Gross Profit = 827,733,335 X 100 577,378,333 X100 Rs. 1,026,180,900 730,093,065 = 80.66% 79.08% According to the definition of gross profit ratio, the company who has generated the highest value of gross profit is best/ preferred, because gross margin should be adequate to cover-up other expenses of the company. According to the above analysis, Companies can be rank as below, In 2010 – Good 2009 - Average Profitability Ratios Gross Profit Ratios Return on Asset Ratios Return on Equity Ratios
- 6. 5.1.2. RETURN ON ASSETS RATIO Return on Assets Ratio is an overall measure of profitability. Because it measures the efficiency with which the company is managing its investment in assets and using them to generate profit. It measures the amount of profit earned relative to the firm's level of investment in total assets. Net Income is taken from the income statement and total assets are taken from the balance sheet. The higher the percentage is the better, because that means the company is doing a good job using its assets to generate sales. Formula: Return on Assets Ratio =Net Profit after Tax X100 Average or Total Assets Year 2010 2009 Return on Assets Ratio = 23,651,446 X 100 (351,985,121) X100 Rs. 8,271,789,383 8,081,784,320 = 2.85% (4.35) % CALCULATION AND COMPARISON OF RETURN ON ASSETS RATIOS INTERPRETATION OF PROFITABILITY RATIOS 5.1.3. RETURN ON ASSETS RATIO Hotel Galadari has generate in 2010, compare to 2009 return on assets ratio managed investments on assets and utilized them to generate disenable profit as low level. They have done negative ratio value compare to 2009 and they are in bad position in using their assets to generate the profits due to having huge loss making investment project under financial crisis situation as well as their profits are heavily affected from exchange losses. 5.1.4. RETURN ON STOCK HOLDER’S EQUITY RATIO Return on Stock Holder’s Equity Ratio is perhaps the most important of all the financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company. Net income comes from the income statement and stockholder's equity comes from the balance sheet. In general, the higher the percentage is the better; it shows that the company is doing a good job using the investors' money.
- 7. Formula: Return on Stock Holder’s Equity = Net Income X100 Average Common Stockholder’s Equity Year 2010 2009 Return on Stock Holder’s Equity = 23,651,446 X 100 (351,985,121) X100 Rs. 1,527,843,977 1,346,063,925 = 1.5% (26.15) % CALCULATION AND COMPARISON OF RETURN ON EQUITY RATIOS INTERPRETATION OF PROFITABILITY RATIOS 4. RETURN ON STOCK HOLDER’S EQUITY Management of the Galadari Hotels Plc is able to utilize investor’s money effectively and efficiently. Therefore the investors of Galadari Hotels PLC. Has taken the low level return on the capital that they have invested in to the company. And very poor return on equity ratio. There are unable to generate sufficient profits to pay off fair retunes to their investors’ mainly due heavy out flow of financial expenses based on interest payments for bank overdrafts, financial leases and term loans and administration expenses. 2. LIQUIDITY RATIOS A class of financial metrics that is used to determine a company's ability to pay off its short- terms debts obligations. Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers are particularly interested in assessing liquidity. The ratios we can use to determine the company’s short-term debt-paying ability are the current ratio, the acid-test, receivable turnover and inventory turnover. Classifications of Liquidity ratios Liquidity Ratios Current Ratios Acid –Test (Quick) Ratio Debtor’s collection Period
- 8. 2.1. CURRENT RATIO The current ratio is a widely used measure for evaluating a company’s liquidity and short –term debt-paying ability. The ratio is computed by dividing current assets by current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). The higher the current ratio, the better. Formula: Current Ratio = Current Assets Current Liabilities Year 2010 2009 Current Assets 453,771,761 239,416,915 Current Liabilities 632,017,071 347,183,942 Current Ratio 0.71 0.69 The current ratio is sometimes referred to as the working capital ratio; working capital is current assets minus current liabilities. The current ratio is a more dependable indicator of liquidity than working capital. The current ratio is only one measure of liquidity. It does not take into account the composition of the current assets. For example a satisfactory current ratio does not disclose the fact that a portion of the current assets may be tied up in slow-moving inventory. A dollar of cash would be more readily available to pay the bills than a dollar of slow- moving inventory. INTERPRETATION OF LIQUIDITY RATIOS FOR THE GALADARI HOTELS PLC. Hotel Gladari current ratios do not significantly vary in both comparable years. Though Company has an increase in 2010 and slightly decrease in the financial year 2009. Thus decrease in the current ratio represents that there has been deterioration in the liquidity position of the firm. 2.2. ACID-TEST (QUICK) RATIO The acid-test (Quick) ratio is a measure of a company’s immediate short-term liquidity. We compute this ratio by dividing the sum of cash, short-term investments and net receivables by current liabilities. Thus, it is an important complement to the current ratio.
- 9. Calculation and comparison of Acid –Test (Quick) Ratio Year 2009/2010 2008/2009 Cash and Cash Equivalents 67,832,667 93,687,036 Marketable securities 221,295,981 34,510,654 Accounts receivable 98138418 75940670 Current liabilities 632,017,071 316,724,410 High degree of Certainty Company will cash flow problem. Who is a man responsible having cash flow problem? 1. Managers not collecting cash on time 3. ACTIVITY RATIOS Activity ratios measure a firm's ability to convert different accounts (asset, liability or capital share) within their balance sheets into cash or sales (revenue). Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Activity ratios are critical in evaluating a company’s fundamentals because in addition to expressing how well a company generates revenue, activity ratios also indicate how well the company is being managed. CLASSIFICATIONS OF ACTIVITY RATIOS Quick Ratio Year Galadari Hotel 2010/2011 0.57 2009/2010 0.77 Activity Ratio measures the efficiency with which the recourses of a firm have been employed and its indicate the speed with which assets are being turned over into sales.. Activity Ratios Inventory/Stock Turnover Ratio Debtors / Receivables Turnover Ratio Assets Turnover Ratio
- 10. 3.1 RECEIVABLE TURNOVER It can measure liquidity by how quickly a company can convert certain assets to cash. The ratio used to assess the liquidity of the receivable is receivables turnover. It measures the number of times, on average; the company collects receivables during the period. Receivable Turnover = Sales Average Accounts Receivable (2010) = 1,026,180,900 (32,865,532 + 23,220,120) 2 = 1,026,180,900 56,085,652 = 1,026,180,900 56,085,652 = 36.59 They collect cash from the customers 36.59 (rounding off 37) times in a financial year. 3.1.2. Collection Period = 365 Receivable Turnover =365 36.56 9.975 = 10days Credit period is always 30days. This 10days collection period is not good for Galadari Hotels PLC. As a five star hotel. Otherwise collection can be going down. 3.3 INVENTORY TURNOVER Inventory / Stock Turnover Ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not. It measures the number of times, on average; the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory. Inventory Turnover = Cost of Goods Sold Average inventory = 198,447,565 129,229,093 + 99,432,385 2
- 11. = 198,447,565 228,661,481 = 0.86 3.4 HOLDING PERIOD HOLDING PERIOD = 365 Inventory Turnover = 365 0.86 =424 days Always industry holding period average is 50days. This situation is bad that’s why Galadari Hotels PLC. 3.5 ASSET TURNOVER RATIO Asset Turnover Ratio measures the revenue that is generated for every rupee of asset owned by the company. Asset turnover ratios help to measure the effectiveness with which the company/management uses its assets to generate sales or revenue. These ratios help to measure the productivity of a company's assets Asset Turnover = Total Sales Average total Assets = 1,026,180,900 453,771,761 + 239,416,915 2 = = 1,026,180,900 693,188,676/2 = 1,026,180,900 346,594,338 = 2.96
- 12. 4. MARKET RATIOS Market ratios measure the investor response to owning a company's stock and also the cost of issuing stock. A market-value ratio is a metric used to gauge a company's viability in terms of such variables as profitability and the market valuation of its stock. These ratios are used analytically by a company's management as well as by its current and prospective investors. A market-value ratio also acts as an indicator that expresses the value of a company's stock in terms of a specific item in its financial statements. Different ratios indicate a company's viability, or financial health, where asset values, revenue, income, and ability to pay bills are concerned. Classifications of Market ratios 4.1 EARNINGS PER SHARE Earnings per share (EPS) the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Basic Earnings per share is calculated by dividing the net loss for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year and previous year are adjusted for events that have change the number of ordinary shares outstanding, without a corresponding change in the resources such as a bonus issue. Formula EPS = Net Profit after Tax Average Number of issued ordinary shares Calculation and Interpretation of Earnings per share Ratios Market Ratios Earnings per share Ratios Dividends Payout Ratios Price Earnings Ratios
- 13. Financial Data/ Year 2010 2009 Profit/Loss after Tax 23,651,446 -351,985,121 Average Number of issued ordinary shares 182,434,060 182,433,060 EPS 0.13 (1.93) Earnings per share ratio signify the amount of earnings available for the investors who have been invested or willing to invest in equity shares of the company. This ratio gives the amount of earnings can be attribute to a single share of the company. 4.2 PRICE EARNINGS RATIO The Price-to-Earnings ratio (P/E ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. (P/E) ratio indicates the value of a company's stock relative to its financial performance. It is sometimes called a multiple because it indicates the amount of money that must be invested in order to derive one dollar of earnings. For this reason, lower ratios are preferred to higher ones. Formula Price Earnings Ratio = Market Price per Share Earnings per Share Calculation and Interpretation of Price Earnings Ratios for three companies Financial Data/ Year 2010 2009 Market Value per share (Rs.) 10 15 EPS(Rs.) 0.13 (1.93) P/E Ratio 76.92 -7.7 The calculated P/E Ratio reflects that the Galadari Hotels PLC. Earings in positive after 4 years as Rs. 76.92/- . Due to the face that Galadary having after tax loss it has resulted with an negative EPS in 2009. A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. The P/E ratio has units of years which can be interpreted as "number of years of earnings to pay back purchase price. If we consider the number of years to pay up the purchase value of the share by its earnings, hypothetically for an investors of Galadari hotels Plc it takes 76.92 if the company continues to earn current level of profits.
- 14. 5. PERFORMANCE OVERVIEW OF GALADARI HOTELS (LANKA) PLC.: During the financial year ended December 2010, the Group achieved revenues of Rs. 1026 million. The turnover for the year under review was Rs. 1,026,180,900/- while the Gross Profit was Rs. 827,733,335/-, resulting in a 41% increase in the turnover and 43% increase in the Gross Profit Comparison with year 2009. Stated Capital Rs. 1.8 billion Market value per share is Rs. 15.00 Earnings per share is Rs. (0.13) Share Capital as at 31st December 2010 –Rs. 1,527,844/- The reconstruction of the Hotel continued throughout the year 2010. 6. CONCLUSION The various ratios that have been identified in determining a financial situation can be categorized in to Galadari Hotels PLC. Elements i.e. Profitability Ratio, Liquidity ratio, Solvency ratio, Activity and Market ratio. As described in the introduction each of these ratios play a specific function with reference to the functionality and the status quo of an organization. In the case of the specific exercise, the hotel industry has been selected and the annual report of the Galadari Hotel PLC has been analyzed. The profiles of the companies have been shown in the introduction and the annual reports have been annexed. Profitability ratio: Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom-line. The profitability ratios are then categorized in to several other ratios: Gross profit, Net profit, return on asset, return on equity and return on capital employed. The importance of these ratios is that to an investor the ratios give information on the general direction of the identified company. The investor can then decide whether to hold, buy or sell his or her shares. Also based on the ratios the investor can identify if a company has over borrowed or if the company can meet its short term liquidity issues. The shareholders know whether the on track as expected are entitled to dividend. Hence when considering the profitability ratio, the most profitable entity is in 2010 than 2009 in Galadari Hotels PLC. Hence the company represents comparatively sound ratios.
- 15. REFERENCE GALADARI HOTELS (LANKA) PLC. Annual Report year of 2010 www.cse.lk/cmt/upload_report_file/532_1274867640886.pdf www.cse.lk/cmt/upload_report_file/690_1275657128533.pdf

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## Financial Ratio Analysis Assignment Help

## To Know More

Assignment help service by Assignment Help Experts is rated 5.00 based on 37492 student reviews.

## Financial Ratios

The use of financial figures to gain significant information about a company

## What are Financial Ratios?

Financial ratios are grouped into the following categories:

## Uses and Users of Financial Ratio Analysis

Analysis of financial ratios serves two main purposes:

## 1. Track company performance

## 2. Make comparative judgments regarding company performance

Users of financial ratios include parties external and internal to the company:

- External users: Financial analysts, retail investors, creditors, competitors, tax authorities, regulatory authorities, and industry observers
- Internal users: Management team, employees, and owners

## Liquidity Ratios

Current ratio = Current assets / Current liabilities

Acid-test ratio = Current assets – Inventories / Current liabilities

Cash ratio = Cash and Cash equivalents / Current Liabilities

Operating cash flow ratio = Operating cash flow / Current liabilities

## Leverage Financial Ratios

The debt ratio measures the relative amount of a company’s assets that are provided from debt:

Debt ratio = Total liabilities / Total assets

Debt to equity ratio = Total liabilities / Shareholder’s equity

The interest coverage ratio shows how easily a company can pay its interest expenses:

Interest coverage ratio = Operating income / Interest expenses

The debt service coverage ratio reveals how easily a company can pay its debt obligations:

Debt service coverage ratio = Operating income / Total debt service

## Efficiency Ratios

The asset turnover ratio measures a company’s ability to generate sales from assets:

Asset turnover ratio = Net sales / Average total assets

Inventory turnover ratio = Cost of goods sold / Average inventory

Receivables turnover ratio = Net credit sales / Average accounts receivable

Days sales in inventory ratio = 365 days / Inventory turnover ratio

## Profitability Ratios

Gross margin ratio = Gross profit / Net sales

Operating margin ratio = Operating income / Net sales

Return on assets ratio = Net income / Total assets

Return on equity ratio = Net income / Shareholder’s equity

Learn more about the different profitability ratios in the following video:

## Market Value Ratios

Dividend yield ratio = Dividend per share / Share price

The earnings per share ratio measures the amount of net income earned for each share outstanding:

Earnings per share ratio = Net earnings / Total shares outstanding

The price-earnings ratio compares a company’s share price to its earnings per share:

Price-earnings ratio = Share price / Earnings per share

## Related Readings

- Analysis of Financial Statements
- How the 3 Financial Statements are Linked
- Comparable Company Analysis
- Types of Financial Models
- See all accounting resources
- See all capital markets resources

## Free Accounting Courses

## Financial Analysis

a) Historical trends in accounting statement entries

Table 1: Historical Trends of Apple

(Source: Annual Report, 2017a, Annual Report, 2017b, Yahoo Finance, 2018a & Yahoo Finance, 2018b)

Table 2: Historical Trends of Intel

b) Historical trends and inter-company comparisons of relevant accounting ratios

Table 6: Capital Structure ratios

Akasie, G. (2010) Accounting Essentials: Concepts, Terms, and Meaning . USA: AuthorHouse.

Lasher, W. R. (2010) Practical Financial Management . USA: Cengage Learning.

Squire, L. R. (2013) Fundamental accounts, Academic Press: California.

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## A Complete Tutorial On Ratio Analysis In Accounting

## Introduction

## Main Body/Discussion

The major categories of financial ratios are discussed below including formulas.

## Profitability Ratios

## Margin ratios

Read Also- What is the major objective of managerial accounting?

## Return ratios

## Liquidity Ratios

## Solvency Ratio

## Efficiency Ratios

Read Also- Revenue Expenditure: Full Explanation

## Examples of Ratio used in Financial Analysis

- Current Ratio : These types of ratios are used to compare the current assests to current liabilities. This happens to see that whether a business has enough cash to pay its immediate liabilities.
- Days Sales Outsatnding: These types of ratios are used to determine the ability of a business to effectively issue credit to the customers and also to be paid back on the given peiod of time.
- Debt to Equity Ratio: This usually compares the proportion of debt to equity, to see if a business has taken on too much debt.
- Dividend Payout Ratio: This is usually the percentage of earning that are paid to investors in the form of dividends. If the percentage is low, then it will be an indicator that there is no room left for the dividend payments that could increase the sustainability.
- Gross Profit Ratio: This ratio is probably used for calculating the proportion of earnings generated by the sale of goods or services., before the administrative expenses are included.
- Inventory Turnover: This is used to calculate the the time it takes to sell of the inventory. A low turn over may figure out that a business has an excessive investment in inventory, and therefore is at risk of having obsolete inventory.
- Net-Profit Ratio: This is used to calculate the proportion of net profit to sales. A low proportion can indicate the bloated cost structure or pricing pressure.
- Price Earning Ratio: This is used to compare the price paid for a company’s shares to the earnings reported by the business. An excessively high ratio signals that there is no basis for a high stock price, which could presage a stock price decline.
- Return on assests: This is used to calculate the ability of management to efficiently use assests that could generate the profits. In case there is low return then it indicated that there is a bloated investment in assets.

## Most Popular FAQ

## By Susan White

## How to Analyze Your Business Using Financial Ratios

A ratio can be expressed in several ways. A ratio of two-to-one can be shown as:

As you use this guide you will become familiar with the following types of ratios:

Common Size Ratios from the Balance Sheet

Here is what a common size balance sheet looks like for the mythical Doobie Company:

ABC Company Common Size Balance Sheet For the year ending December 31, 200x

(Multiplying by 100 converts the ratio into a percentage.)

Compute common size ratios using your company's balance sheet.

Common Size Ratios from the Income Statement

Here is what a common size income statement looks like for the fictional Doobie Company:

Compute common size ratios from your income statement.

Here is the formula to compute the current ratio.

Current Ratio = Total current assets/Total current liabilities

Here is the formula for the quick ratio:

Quick Ratio = (Current Assets − Inventory)/Current Liabilities

Using the balance sheet data for the Doobie Company, we can compute the quick ratio for the company.

Quick ratio for the Doobie Company:

(65,000 − 22,000)/40,000 = 1.07

Compute a current ratio and a quick ratio using your company's balance sheet data.

The four ratios we will look at are:

Inventory Ratio = Cost of Goods Sold/Inventory

Sales-to-Receivables Ratio = Net Sales/Net Receivables

Doobie Company Sales-to-Receivables Ratio:

It is computed using the sales/receivables ratio. Here is the formula:

Days' Receivables Ratio = 365/Sales Receivables Ratio

Doobie Company Days' Receivables Ratio

Debt-to-Worth Ratio = Total Liabilities/Net Worth

Doobie Company debt-to-worth ratio: $140,000/40,000 = 3.5

Working Capital = Total Current Assets − Total Current Liabilities

Net Sales to Working Capital Ratio = Net Sales/Net Working Capital

Doobie Company Net Sales to Working Capital Ratio $200,000/25,000 = 8

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