Description
different types of ratios used for financial statement analysis which include liquidity ratios, solvency ratios, turnover ratios, profitability ratios, equity related ratios. It also lists points for utility of financial statement analysis.`
Financial Statement Analysis
Financial Analysis
Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by property establishing relationships between the items of the balance sheet and the profit and loss account.
Users of Financial Analysis
• Trade creditors • Lenders • Investors • Management
Nature of Ratio Analysis
A financial ratio is a relationship between two accounting numbers. Ratios help to make a qualitative judgement about the firm’s financial performance.
Standard of Comparison
• Time series analysis • Inter-firm analysis • Industry analysis • Proforma financial statement analysis
Types of Financial Ratios
• Liquidity ratios • Solvency ratios • Turnover ratios • Profitability ratios • Equity-related ratios
Liquidity Ratios
• Liquidity ratios measure a firm’s ability to meet its current obligations.
Current assets Current ratio = Current liabilities Current assets – Inventories Quick ratio = Current liabilities Cash + Marketable securities Cash ratio = Current liabilities
Solvency Ratios
• Solvency ratios measure the dependence of a firm on borrowed funds.
Debt Equity (Net Worth) Debt Debt = Debt ratio = Debt + Equity Capital employed Earnings before interest and tax Interest coverage = Interest
Debt-equity ratio =
Turnover Ratios
• Turnover or activity ratios measure the firm’s efficiency in utilizing its assets.
Cost of goods sold or net sales Average (or closing) inventory Number of days in the year (say, 360) Days of inventory holding = Inventory turnover Credit sales or net sales Debtors turnover = Average (or closing) debtors Number of days in the year (say, 360) Collection period = Debtors turnover Inventory turnober =
Turnover Ratios
Net sales Current assets turnover = Current assets Net sales Net current assets turnover = Net current assets Net sales Fixed assets turnover = Net fixed assets Net sales Net assets turnover = Net assets or capital employed
Profitability Ratios
• Profitability ratios measure a firm’s overall efficiency and effectiveness in generating profit.
Margin = Profit before interest and tax (PBIT) Net sales Profit after tax (PAT) Net margin = Net sales PBIT Before tax return on investment = Net assets Profit after tax Return on equity = Equity (net worth)
Equity-related Ratios
• Equity-related ratios measure the shareholders’ return and value.
Profit after tax EPS = Number of ordinary shares Dividends DPS = Number of ordinary shares Dividends DPS Payout ratio = = EPS Pr ofit after tax DPS Dividend yield = Market value per share
Equity-related Ratios
EPS Earnings yield = Market value per share Market value per share P / E ratio = EPS Net worth Book value per share = Number of ordinary shares Market value per share M B value = Book value per share Market value of assets Tobin ' s q = Economic value of assets
Utility of Ratio Analysis
• Assessment of the firm’s financial conditions and capabilities. • Diagnosis of the firm’s problems, weaknesses and strengths. • Credit analysis • Security analysis • Comparative analysis • Time series analysis
doc_480075134.pdf
different types of ratios used for financial statement analysis which include liquidity ratios, solvency ratios, turnover ratios, profitability ratios, equity related ratios. It also lists points for utility of financial statement analysis.`
Financial Statement Analysis
Financial Analysis
Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by property establishing relationships between the items of the balance sheet and the profit and loss account.
Users of Financial Analysis
• Trade creditors • Lenders • Investors • Management
Nature of Ratio Analysis
A financial ratio is a relationship between two accounting numbers. Ratios help to make a qualitative judgement about the firm’s financial performance.
Standard of Comparison
• Time series analysis • Inter-firm analysis • Industry analysis • Proforma financial statement analysis
Types of Financial Ratios
• Liquidity ratios • Solvency ratios • Turnover ratios • Profitability ratios • Equity-related ratios
Liquidity Ratios
• Liquidity ratios measure a firm’s ability to meet its current obligations.
Current assets Current ratio = Current liabilities Current assets – Inventories Quick ratio = Current liabilities Cash + Marketable securities Cash ratio = Current liabilities
Solvency Ratios
• Solvency ratios measure the dependence of a firm on borrowed funds.
Debt Equity (Net Worth) Debt Debt = Debt ratio = Debt + Equity Capital employed Earnings before interest and tax Interest coverage = Interest
Debt-equity ratio =
Turnover Ratios
• Turnover or activity ratios measure the firm’s efficiency in utilizing its assets.
Cost of goods sold or net sales Average (or closing) inventory Number of days in the year (say, 360) Days of inventory holding = Inventory turnover Credit sales or net sales Debtors turnover = Average (or closing) debtors Number of days in the year (say, 360) Collection period = Debtors turnover Inventory turnober =
Turnover Ratios
Net sales Current assets turnover = Current assets Net sales Net current assets turnover = Net current assets Net sales Fixed assets turnover = Net fixed assets Net sales Net assets turnover = Net assets or capital employed
Profitability Ratios
• Profitability ratios measure a firm’s overall efficiency and effectiveness in generating profit.
Margin = Profit before interest and tax (PBIT) Net sales Profit after tax (PAT) Net margin = Net sales PBIT Before tax return on investment = Net assets Profit after tax Return on equity = Equity (net worth)
Equity-related Ratios
• Equity-related ratios measure the shareholders’ return and value.
Profit after tax EPS = Number of ordinary shares Dividends DPS = Number of ordinary shares Dividends DPS Payout ratio = = EPS Pr ofit after tax DPS Dividend yield = Market value per share
Equity-related Ratios
EPS Earnings yield = Market value per share Market value per share P / E ratio = EPS Net worth Book value per share = Number of ordinary shares Market value per share M B value = Book value per share Market value of assets Tobin ' s q = Economic value of assets
Utility of Ratio Analysis
• Assessment of the firm’s financial conditions and capabilities. • Diagnosis of the firm’s problems, weaknesses and strengths. • Credit analysis • Security analysis • Comparative analysis • Time series analysis
doc_480075134.pdf