FINANCIAL

ANALYSIS OF
FINANCIAL
RATIOS
STATEMENTS
 01

CLASS Define the measurement levels namely, liquidity, solvency,

efficiency, and profitability.

OBJECTIVES
The learner should 02
be able to:
Compute, analyze and interpret financial ratios such as current
ratio, gross profit ratio, net profit ratio, receivable turnover,
inventory turnover, receivable turnover, debt-to-equity ratio, and
the like.
 These are powerful tools to
FINANCIAL help summarize financial

RATIOS statements and the health of a

company or enterprise.
 LET'S DISCUSS AND ANALYZE

PROFITABILIT OPERATIONAL FINANCIAL

Y
It is a business' ability to EFFICIENCY HEALTH RATIO
produce a return on an It measures the ability of It looks into the company's
investment based on its the company to utilize its solvency and liquidity.
resources in comparison assets.
with an alternative
investment..
 PROFITABILITY RATIOS
it measures the ability of the company to
generate income from the use of its assets and
invested capital as well as control its cost.
 These are some of the commonly used
profitability ratios

Net Profit Ratio

Gross Profit Ratio
- It reports the peso value
of gross profit for every
peso of sales.
Gross Profit
Net Sales
Operating Income Ratio
- It relates to the peso
- It expresses operating
value of the net income to
income as a percentage of
every peso of sales.
sales.
Operating Income Net Income
Net Sales Net Sales
 These are some of the commonly used
profitability ratios

Return on Assets
Return on Equity
- It measures the peso
- It measures the return
value of income generated
generated by owner's capital
by employing the
invested in the busness.
company's assets.
Net Income
Net Income
Average Assets
Average Equity
OPERATIONAL EFFICIENCY
It primarily measures the efficiency of profit
earned as a function of operating costs.
 The turnover ratios are primarily used to
measure operational efficiency.

Asset Turnover Fixed Asset Turnover Inventory Turnover

- It measures the peso
value of sales generated for
every peso of the
company's asset.
Net Sales
Average Asset
- It is an indicator of the
efficiency of fixed assets in
generating sales.
Net Sales
Average Fixed Asset
- It is an indicator of how
fast the company can sell
an inventory.
Cost of Goods Sold
Inventory
 The turnover ratios are primarily used to
measure operational efficiency.

Accounts Receivable Turnover

Days in Inventory Days in Accounts Receivable
- It measures the number of times
- It is an alternative to - It is an alternative to Accounts
the company was able to collect
Receivable Turnover.
Inventory Turnover. on its accounts receivable during
the year..
365
Inventory Turnover 365
Net Sales
Accounts Receivable Turnover
Average Accounts Receivable
FINANCIAL HEALTH RATIOS

It measures the company's solvency and

liquidity.
 LIQUIDITY

IT REFERS TO THE COMPANY'S ABILITY TO

SATISFY ITS SHORT-TERM OBLIGATIONS AS
THEY COME DUE.
 TYPES OF LIQUIDITY RATIOS

Current Ratio Quick Ratio

- It measures a company's
ability to pay off its current
liabilities.
Current Assets
Current Liabilities
- It measures a company's
ability to meet its short-term
obligations with its most
liquid assets
Quick Assets
Current Liabilties
 SOLVENCY

IT REFERS TO THE COMPANY'S ABILITY TO

PAY THEIR LONG-TERM LIABILITIES.
 TYPES OF SOLVENCY RATIOS

Debt Ratio Equity Ratio

- It indicates the percentage - It indicates the percentage
of the company’s assets that of the company’s assets that
are financed by debt. are financed by capital.

Total Debt Total Equity

Total Assets Total Assets
 TYPES OF SOLVENCY RATIOS

Debt-to-Equity Ratio Interest Coverage Ratio

- It is a variation of debt - It shows the company's
ratio, shows the proportion ability to pay its fixed interest
of debt to equity. charges.

Total Liabilities Earnings Before Interest and Taxes

Total Equity Interest Expense