Financial mix ratio analysis is analytical tool employing to ratio or proportion of a certain item in the financial

statement vis--vis other related items in the same financial statement or other statements to determine comparative
performance.

In a financial ratio analysis, the item in the statement of financial position or statement of comprehensive
income being evaluated or compared is assumed to have a direct relationship with other items in the statement.

The broad classification of financial ratios are as follows:

1. Liquidity
2. Solvency or stability ratios
3. Profitability ratios

Liquidity Ratios are a group of ratios that measure the ability of business firm to pay off short-term obligations as they
mature. These ratio show the relationship of the firms current assets to current liabilities.

The liquidity ratios are as follows:

1. Current ratio
2. Quick or acid test ratio
3. Receivable turnover
4. Inventory turnover

Current Ratio

- It indicates the extent to which the current liabilities are covered by the current asset.

- The most commonly used measure of short-term solvency because it serves as a single indicator of the extent to
which the claims of short-terms creditors are covered by the current assets.

Quick Ratio or Acid Test Ratio

The quick ratio or acid ratio is a more stringent measure of the liquidity status of a business firm since some
current assets are not included in the computation.

Quick Assets

- Include only the following cash, trading securities, and trade receivable

Formula:

Quick Assets = Cash + Trading Securities + Trade Receivables

Quick Ratio or Acid Test Ratio =

Receivable Turnover

- Measures the velocity of conversation of trade receivables into cash during the year. It answers the question:
How many times during the year has a receivable been converted into cash?

Receivable Turnover =

+
Average Trade Receivable = 2
Inventory Turnover

- The inventory turnover ratio measures the number of times inventories are acquired and sold during the year. In
a typical situation, profit are realized from sale of inventories; hence the faster the sale of the goods, the higher
is the profit. This indicates that a high inventory turnover is favorable to the business.

The inventory turnover is completed is computed using this formula:

Inventory Turnover =

The average inventory is computed as follows:

+
Average inventory =
2

Solvency Ratios

The solvency ratios, otherwise known as the stability ratios, are a group of financial ratios that measure the
ability of a business to settle its financial obligation when they mature and to remain still financially stable

Debt Ratio

The debt ratio measures the proportion of funds provided by creditors on the total resources of the business. In
other words, this ratio reflects the percentage of total assets that are financed with debts or by creditors.

The debt ratio is computed as follows:

Debt Ratio =

Equity Ratio

The liquidity ratio determines the proportion of resources provided by the owner or owners of the business. It
presents the financial strengths of the business as it provides the margin of safety that the company affords to creditors.

The equity ratio is computed as follows:

Equity Ratio =

The equity ratio may be also be computed as follows:

Equity Ratio = 1 Debt ratio

Debt-to-Equity Ratio

The Debt-to-Equity Ratio measures the proportion of debt and equity in the capital structure of the business.
This measures also indicates whether the company favor risk in its capital structure or not.

The formula to compute the debt-to-equity ratio is as follows:

Debt-to-Ratio =

Probability Ratios

Probability ratios are group of ratios that reflect the combined effect of liquidity and management efficiency in
handling the asset and liabilities relative to the operations of the business. In short, the ratios show the effectiveness of
business operations.
The measures of profitability follows:

1. The gross profit rate

2. Operating profit margin
3. Net profit margin
4. Return of investment

Gross Profit Rate

- Measures the percentage of gross profit to sales. It also measures the percentage of gross profit margin
available to cover the operating expenses for the period. The gross profit rate also reveals the percentage of
cost of sales to sales.

Gross Profit Rate Formula

Gross Profit Rate =

Operating Profit Margin

- Measures the percentage of profit available after deducting the cost of sales and operating expenses from the
sales. The operating profit margin is the difference between the gross profit and the operating expenses.

Operating Profit Margin Formula

Operating Profit Margin =

Net Profit Margin

- Also called return of sales, measures the overall operating results of an entity. The measures considers all
income recognized and all expenses incurred during the period.

Net Profit Margin =

Return on Investment (ROI)

- Also called return on assets, measures the amount of net income per peso of investment in a business. The ratio
reflects the profitability of every peso invested by the owner.

ROI Formula:

ROI =