Financial Statement Analysis 611

Table 25.19: Summary of Ratios

Liquidity Ratios: Profitability Ratios:

Current assets Gross profit EBIT
• Current ratio = • Gross margin = or =
Current liabilities Sales Sales
Current assets − Inventory
• Quick ratio = Profit after tax EBIT(1 − T )
Current liabilities • Net margin = or =
Sales Sales
• Interval measure
Current assets − Inventory PAT
= • PAT to EBIT ratio =
Average daily cash operating expenses EBIT
EBIT
• Returns on investment =
Leverage Ratios: Net assets or capitaal employed
Total debt (ROI) before tax
• Total debt ratio = • Returns on investment =
EBIT (1 − Tax rate)
Capital employed
(ROI) after tax Net assets or capital employed
Net worth
• Debt-equity ratio =
Total debt EBIDTA
• Return on investment =
Capital employed or net assets (ROI) before tax Total assets or Net asset s
• Capital-equity ratio =
Net worth
Profit after-tax
• Return on equity (ROE) =
EBIDTA Net worth
• Interest coverage =
Interest There exists a relationship between various ratios.
Activity Ratios: For example, ROE can be expressed as follows:
Cost of goods sold or sales Sales EBIT PAT Net assets
• Inventory turnover = • ROE = × × ×
Inventory Net assets Sales EBIT Net worth
360
• No. of days, inventory = In practice, companies calculate many other ratios.
Inventory turnover
Most important ratios include:
Credit sales or sales PAT
• Debtors turnover = • EPS =
Debtors No. of shares
360 Profit distributed
• Collection period = • DPS =
Debtors turnover No. of shares

Sales DPS
• Payout =
• Assets turnover = EPS
Net assets or capital employed
Sales Market value of share
• Price-earnings ratio =
• Working capital turnover = EPS
Net working capital
Market value of share
• Market value-book value ratio =
Book value of share

KEY CONCEPTS

Activity ratios DuPont analysis Interval measure Replacement costs

Aging schedule Earnings power Inventory holding period Retention ratio
Assets turnover earnings yield Inventory profit Return on capital
Bonus shares Earnings–price ratio Inventory turnover employed (ROCE)
Cash ratio Ex-bonus price Lease Return on equity (ROE)
Collection period Ex-rights price Leverage factor Return on investment
Common-size statement Financial analysis Leverage ratios (ROI)
Contingent liabilities Financial gearing or Liquidity ratios Return on net assets
Cross-sectional ratio leverage Long-term solvency (RONA)
analysis Financial risk Net profit margin Rights shares
Current ratio Fixed-charges Net working capital ratio Short-term solvency
Debt ratio coverage Operating leverage Time series ratio
Debt-equity ratio Gross profit margin Payout ratio analysis
Debtors turnover Industry analysis Price-earnings ratio Tobin’s q
Debt–trap Interest coverage Pro forma analysis Trading on equity
Discriminant analysis Interest tax shield Profitability ratios Vertical analysis
Dividend yield Inter-firm analysis Quick ratio Z-score