Ratios

Jefferson Acar
Mark Jasper Figueroa
Sean Gervasio
 Liquidity Ratios

• Is a financial ratio that indicates whether a company’s

current assets will be sufficient to meet the company’s
obligations when they become due.

• Measure ability to pay short-term bills.

 Liquidity Ratios
• Current Ratio – measures the company’s ability to pay
short-term obligation or those due within one year.

• Quick Ratio – company’s ability to meet it’s short term

obligations with its most liquid assets.

• Operating Cash Ratio – is a measure of how well current

liabilities are covered by the cash flow generated from
a company’s operation.
 Current Ratio

On December 31 2016, the balance sheet of

Luminaire publishing corp shows the total current
assets of 100,000 pesos and a total current
liabilities of 50,000 pesos.
 Current Ratio

Cash (10,000) + Inventory (30,000) + AR (60,000) 100,000

= = 2.0
AP (50,000) 50,000

The current ratio is 2.0 which means the company’s current assets are
2 times more than its current liabilities.

High Ratio : 1.5 – 2.5

Low Ratio : Below 1
 Quick Ratio

Cash (10,000) – Inventory (30,000) + AR (60,000) 70,000

= = 1.4
AP (50,000) 50,000
 Operating Cash Ratio

Cash Flow from Operations

Operating Cash Ratio =
Current Liabilities

For example, SM had a current liabilities of 77.5 billion pesos and over
the trailing 12 months, SM had generated 27.8 billion in operating cash
flow.

27.8
= 0.34
77.5
Activity:

A company has 35,000 in current assets, 15,000 in long

term assets, 25,000 in current liabilities and 45,000 in
long term liabilities. What is your current ratio?
Let’s assume Carol’s clothing store is applying for a loan. The bank asks
Carol for a detailed balance sheet in order for them to compute the
quick ratio.

•Cash: 10,000
•Accounts Receivable: 5,000
•Inventory: 6,000
•Prepaid Taxes: 500
•Current Liabilities: 14,000

What is Carol’s clothing store’s quick ratio?

Solvency Ratio
 Solvency Ratio
• A key metric used to measure an enterprise’s ability to
meet its debt obligations and is used often by
prospective business lenders.

• The solvency ratio indicates whether a company’s cash

flow is sufficient to meet its short-and long-term
liabilities.

• The lower a company's solvency ratio, the greater the

probability that it will default on its debt obligations.
Formula for Solvency Ratio
 Types of Solvency Ratios

• Debt to Equity Ratio

• Equity Ratio
• Debt Ratio
Debt to Equity Ratio
 Debt to Equity Ratio
• Is a financial, liquidity ratio that compares a company’s
total debt to total equity.

• The debt to equity ratio shows the percentage of

company financing that comes from creditors and
investors.

• A higher debt to equity ratio indicates that more

creditor financing (bank loans) is used than investor
financing (shareholders).
Formula for Debt to Equity Ratio
• The debt to equity ratio is calculated by dividing total
liabilities by total equity. The debt to equity ratio is
considered a balance sheet ratio because all of the
elements are reported on the balance sheet.
Example of Debt to Equity Ratio
Assume a company has $100,000 of bank lines of credit
and a $500,000 mortgage on its property. The shareholders
of the company have invested $1.2 million. Here is how
you calculate the debt to equity ratio.

• Your Debt to Equity Ratio is 0.5:1 or 50%

Equity Ratio
 Equity Ratio
• is a Solvency Ratio that measures the amount of assets
that are financed by owners’ investments by comparing
the total equity in the company to the total assets.

• The first component shows how much of the total

company assets are owned outright by the investors.

• The second component inversely shows how leveraged

the company is with debt.
 Formula of Equity Ratio
The equity ratio is calculated by dividing total equity by
total assets. Both of these numbers truly include all of the
accounts in that category. In other words, all of the assets
and equity reported on the balance sheet are included in
the equity ratio calculation.
 Example of Equity Ratio
Tim’s Tech Company is a new startup with a number of
different investors. Tim is looking for additional financing
to help grow the company, so he talks to his business
partners about financing options. Tim’s total assets are
reported at $150,000 and his total liabilities are $50,000.
Based on the accounting equation, we can assume the
total equity is $100,000. Here is Tim’s equity ratio.

• Equity Ratio is 2:3 or 67%

Debt Ratio
 Debt Ratio
• Is a Solvency Ratio that measures a firm’s total
liabilities as a percentage of its total assets.

• Shows a company’s ability to pay off its liabilities with

its assets.

• Shows how many assets the company must sell in order

to pay off all of its liabilities.

• Measures the financial leverage of the company.

 Formula of Debt Ratio
• The debt ratio is calculated by dividing total liabilities
by total assets. Both of these numbers can easily be
found the balance sheet. Make sure you use the total
liabilities and the total assets in your calculation. The
debt ratio shows the overall debt burden of the
company—not just the current debt.
 Examples of Debt Ratio
Dave’s Guitar Shop is thinking about building an addition
onto the back of its existing building for more storage.
Dave consults with his banker about applying for a new
loan. The bank asks for Dave’s balance to examine his
overall debt levels.

The banker discovers that Dave has total assets of

$100,000 and total liabilities of $25,000. Dave’s debt ratio
would be calculated like this:
 Activity
ABC company has applied for a loan. The lender of the loan requests you to
compute the debt to equity ratio as a part of the long-term solvency test of the
company. The “Liabilities and Stockholders’ Equity” section of the balance sheet
of ABC company is given below:

Compute debt to equity ratio of ABC company.

PNGSA has shareholders' funds worth $1,800,000 and total
assets, which are equivalent to liabilities worth
$3,000,000.

Compute for the Equity Ratio of PNGSA.

The following figures have been obtained
from the balance sheet of XYL Company.

Current Assets 3,500,000

Non-Current Assets 12,100,000
Total Assets 15,600,000

Total Liabilities 11,480,000

Stockholders' Equity 4,120,000
Total Liabilities and Equity 15,600,000

Compute For Debt Ratio

• https://www.investopedia.com

• https://www.accountingformanagement.org

• https://www.accountingverse.com

• https://corporatefinanceinstitute.com

• https://www.investopedia.com/terms/s/solvencyratio.asp

• https://www.myaccountingcourse.com/financial-ratios/solvency-ratios

• https://www.myaccountingcourse.com/financial-ratios/equity-ratio

• https://www.myaccountingcourse.com/financial-ratios/debt-ratio

• https://www.accountingformanagement.org/debt-to-equity-ratio/

• https://www.accountingverse.com/managerial-accounting/fs-analysis/debt-ratio.html

• https://www.readyratios.com/reference/debt/equity_ratio.html