Ratio Analysis

Ratio analysis is basically used to understanding the financial health of a business entity. With the help of ratios we can easily calculate from current year performance of the companies and are then compared to previous years. Ratio analysis conducts a quantitative analysis of information in a companys financial statements. These Ratios are most commonly used in banking sector can be divided into five main categories

Liquidity Ratios Leverage Ratios Profitability Ratios Activity Ratios Market Ratios A) Liquidity Ratios Liquidity Ratios are used to determine a company's ability to meet its short terms obligations. These include; 1) Current Ratio 2) Acid Test Ratio 3) Working capital

Current Ratio What Does Current Ratio Mean? A liquidity ratio that measures a company's ability to pay short-term obligations. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". OR It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. Formula = Current Assets / Current Liabilities This ratio answer in Times

Acid Test Ratio What Does Acid-Test Ratio Mean? A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. Also known as the "Acid-test ratio" or the "Quick assets ratio" or Liquidity ratio. OR An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Formula = Current Assets Inventories Prepaid Expense / Current Liabilities OR Acid Test Ratio = Quick Assets / Current Liabilities Quick Assets = Current assets - (Stock + Prepaid Expenses) This ratio answer in Times Working Capital What Does Working Capital Mean? A measure of both a company's efficiency and its short-term financial health. Also called net current assets or current capital. OR The cash available for day-to-day operations of an organization. Net liquid assets computed by deducting current liabilities from current assets. The amount of available working capital is a measure of a firm's ability to meet its short-term obligations. Formula = Current Assets Current Liabilities This ratio answer in Rs
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B) Leverage Ratios Leverage ratios measure the degree of protection of suppliers of long term funds. These include: 1) Times Interest Earned 2) Debt Ratio 3) Debt / Equity Ratio 4) Debt to Tangible Net worth Ratio 5) Total Capitalization Ratio Times Interest Earned What Does Times Interest Earned - TIE Mean? A metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. OR The times interest earned ratio indicates the extent of which earnings are available to meet interest payments. The times interest earned ratio is an indicator of a companys ability to meet the interest payments on its debt. Formula = Earning Before Income Tax (EBIT) + Interest Expense / Interest Expense This ratio answer in Times Debt Ratio What Does Debt Ratio Mean? A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. OR Debt ratio indicates the percentage of a company's assets that are provided via debt or liability. Formula = Total Liabilities / Total Assets This ratio answer in %

(Composed & Solved Hafiz M Usman www.vuzs.net) Debt/Equity Ratio What Does Debt/Equity Ratio Mean? It indicates what proportion of equity and debt the company is using to finance its assets. A measure of a company's financial leverage. Formula = Total Liabilities / Total Shareholder Equity This ratio answer in %

Debt to Tangible Net worth Ratio What Does Tangible Net Worth Mean? A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible net worth is calculated by taking a firm's total assets and subtracting the value of all liabilities and intangible assets. Formula = Total Debt / Tangible Net Worth Tangible Net Worth = Total Assets Intangible Assets Total Liabilities This ratio answer in % Total Capitalization Ratio What Does Long-Term Debt To Capitalization Ratio Mean? The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth. Formula = Long Term Debt / (Long Term Debt + Shareholder Equity) This ratio answer in %
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C) Profitability Ratios

Profitability ratios measure the earning ability of a firm. These include: 1) Net Profit Margin 2) Return on Assets 3) DuPont Return on Assets 4) Operating Income Margin 5) Return on Operating Assets 6) Return on Total Equity 7) Gross Profit Margin Net Profit Margin What Does Profit Margin Mean? A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. Formula = (Net Income / Net Sales) x 100 This ratio answer in % Return on Assets What Does Return On Assets - ROA Mean? An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings or revenues. Formula = (Net Income / Total Assets) x 100 This ratio answer in % DuPont Return on Assets What Does DuPont Identity Mean? An expression that breaks return on equity (ROE) down into three parts: profit margin, total asset turnover and financial leverage. It is also known as "DuPont Analysis". Formula = (Net Income / Sales) x (Sales / Total Assets) x 100

This ratio answer in %

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Operating Income Margin What Does Operating Margin Mean? A ratio used to measure a company's pricing strategy and operating efficiency. Formula = Earning before Interest and Taxes (EBIT) / Net Sales x 100 This ratio answer in %

Return on Operating Assets The return on operating assets measure only includes in the denominator those assets actively used to create revenue. This focuses management attention on the amount of assets actually required to run the business, so that it has a theoretical targeted asset level to achieve. A typical result of this measurement is an ongoing campaign to eliminate unnecessary assets. Formula = Earnings before Interest and Taxes / Operating Assets x 100 OR Formula = Net Income / Operating Assets x 100 This ratio answer in %

Return on Total Equity What Does Return On Equity - ROE Mean? The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Formula = Net Income / Total Equity x 100 This ratio answer in %

Gross Profit Margin What Does Gross Profit Margin Mean? The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of goods sold. Formula = Gross Profit / Net Sales x 100 This ratio answer in %

D) Activity Ratios Activity ratios measure a firm's ability to convert different accounts within Their balance sheets into cash or sales. These include: 1) Total Assets Turnover 2) Fixed Assets Turnover

Examples of assets that are usually classified as current assets on a companys balance sheet include: - cash, which includes checking account balances, currency, and undeposited checks from customers (that are not postdated) - petty cash - cash equivalents, such as government securities which were purchased within 90 days of their maturity - temporary investments, such as certificates of deposit maturing within one year of the balance sheet date, and certain other investments - accounts receivable, or trade receivables, after deducting an allowance for doubtful accounts - notes receivable maturing within one year of the balance sheet date - other receivables, such as income tax refunds, cash advances to employees, and insurance claims - inventory of raw materials, work-in-process, finished goods, manufacturing and packaging supplies - office supplies - prepaid expenses, such as insurance premiums which have not yet expired - advance payments on future purchases

To be classified as a current asset, the amounts must be cash or be expected to turn to cash, be used up, or expire within one year of the balance sheet date. In the rare cases where a companys operating cycle is longer than one year, the operating cycle time is used in place of the one-year time period. To assist with the preparation of classified balance sheets, we have prepared the following balance sheet forms and templates