Elizabeth P.

Sansano
BSAT2-A (11:30-12:30 MWF)
RATIO ANALYSIS
- Ratios express the mathematical relationships between one quantity and
another, in terms of a rate, a proportion, or a percentage. Ratio analysis
expresses the relationship among selected financial statement data.
Liquidity Ratios
- Measure the short-term ability of an entity to pay its maturing obligation and to
meet unexpected needs for cash.
Ratio

Formula

Current ratio

Current assets
Current Liabilities

Quick or acid-test
ratio

Current cash debt

coverage ratio

Receivable turnover
ratio

Average collection
period

Cash, short-term
investment, and net
receivables
Current liabilities
Net cash provided
by operating
activities
Average current
liabilities

Net credit sales

Average trade
receivables (net)

365 days
Receivable turnover
ratio

Purpose of the ratio

The ratio expresses the
relationship of current
assets to current liabilities.
It represents the amount of
current assets available for
every peso of current
liability.
The ratio represents the
amount of quick assets
available for every peso of
current liability.
Measures an entitys ability
to pay off its current
liabilities in a given year of
operations. The ratio
represents the amount of
cash available from current
operations for every peso
of current liability.
Measures liquidity of
receivables. The ratio
measures the number of
times, an average,
receivables are collected
during the period.
Measures the collection
efficiency of the entity. The
computed period indicates
the average number of
days before receivables
are collected.

Inventory turnover
ratio

Number of days in
inventory

Cost of goods sold

Average inventory

365 days
Inventory turnover
ratio

Measures liquidity of
inventory. The ratio
measures the number of
times, on average,
inventory is sold during the
period.
Measures the sales
efficiency of the entity. The
computed number of days
indicates the length of time
spent before inventories
are sold to customers.

Solvency Ratios
- Measure the ability of the entity to survive over a long period of time, that is, its
ability to pay interest as it come due and repay the face value of obligations or
debt at maturity.
Ratio

Formula

Debt to total assets

Total liabilities
Total assets

Debt to equity ratio

Total Liabilities
Total owners equity

Cash debt coverage ratio

Times interest earned

Net cash provided

by operating
activities
Average total
abilities
Profit before interest
charges and taxes
Interest charges

Purpose of the ratio

Measures total assets
provided by creditors. The
ratio indicates the degree
of financial leveraging. It
provides indication of the
ability of an entity to
survive losses without
impairing the interest of its
creditors.
Measures the percentage
of total liabilities to total
equity.
Measures an entitys ability
to repay its liabilities in a
given year of operations.

Measures ability to meet

interest payments as they
come due.

Profitability Ratios
- Measure the profit or operating success of an entity for a given period of time. An
entitys ability or inability to generate profit has several consequences-it affects

an entitys liquidity position and its ability to grow; hence, affecting its ability to
obtain loans and to attract investors.
Ratio

Formula

Profit margin on sales

Profit
Net sales

Rate of return on assets

Rate of return on owners
equity
Earnings per share

Price-earnings ratio
Payout ratio
Asset turnover ratio

Profit
Average total assets
Profit
Average owners equity
Profit minus earnings
attributed to preference
shares
Average outstanding
ordinary shares
Market price of share
capital
Earnings per share
Cash dividends
Profit
Net sales
Average total assets

Purpose of ratio
Measures profit generated
by each peso sales. The
amount of profit generated
by every peso sales. It can
also be interpreted as the
percentage of profit
generated in relation to net
sales.
Measures overall
profitability of assets.
Measures profitability of
owners investment.
Measures profit earned for
each ordinary share
capital.
Measures the ratio of the
market price per share to
earnings per share.
Measures percentage of
earnings distributed in the
form of cash dividends.
Measures the effectiveness
of asset utilization.