FINANCIAL ANALYSIS

Financial Analysis refers to an assessment of the

viability, stability, and profitability of a business,
sub-businesses or project. It is performed by
professionals who prepare reports using ratios and
other techniques, that make use of information taken
from financial statements and other reports.

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FINANCIAL RATIO ANALYSIS

FINANCIAL RATIO
• comparison in fraction, proportion, decimal or FINANCIAL RATIO ANALYSIS
percentage form of two significant figures taken • Tool used to conduct a quantitative
from financial statements analysis of information in a
• expresses the direct relationship between two or company’s financial statements
more quantities in the statement of financial
position and income statement of a business firm

PURPOSE
Through ratio analysis, the financial statements user comes into possession of measures which
provide insight into the profitability of operations, the soundness of the firm’s short-term and long-
term financial condition and the efficiency with which management has utilized the resources
entrusted to it
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Limitations of Financial Ratios

1. Ratios must be used only as financial tools, that is, indicators of weakness or
strength and not be regarded as good or bad per se.

2. Financial ratios are generally computed directly from the company’s financial
statements, without adjustment. Conventional financial statements prepared in
accordance with PFRS have a number of weaknesses that managers must consider
if the ratios are to be meaningful.

3. Ratios are a composite of many different figures – some covering a time period,
others an instant time and still others representing averages.

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Limitations of Financial Ratios

4. Ratios to be meaningful should be evaluated with the use of certain

yardsticks. The most common of these are:

a. company’s own experience (prior years)

b. other companies in the same industry (industry averages)
c. a standard set by management (a budget)
d. rules of thumb

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5 CATEGORIES OF FINANCIAL
RATIOS

1. SOLVENCY RATIOS
2. LIQUIDITY RATIOS
3. BUSINESS VALUATION RATIOS
4. EFFICIENCY RATIOS
5. PROFITABILITY RATIOS

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  Also known as leverage ratios
 Deals with a company’s ability to service in the long-term
liabilities
 Directly measure a company’s total debt against its assets,
equity, and earnings

SOLVENCY RATIOS
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Debt to Equity Ratio

• also known as liability to equity ratio

• examines the relationship between how much of a company’s financing comes from debt,
and how much comes from shareholder equity

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Time Interest Earned Ratio

• Also known as the interest coverage ratio, this financial formula measures a firm’s earnings
against its interest expenses.
• Offers a relatively refined point of view because it highlights the affordability of a company’s
interest payments only.

EBIT = Net income amount + Interest Expense + Tax

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Cash Flow to Debt Ratio

• illustrates how much of the money flowing into a business is available to

meet its debt commitments.​
• offers some idea of whether or not a company is in the position to take on
additional loans, should the need arise.

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Debt to Asset Ratio

• a financial calculation that allows you to evaluate a company’s leverage situation

• accomplished by measuring the percentage of a firm’s assets that are funded by
creditors, rather than by investors.

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Debt to Income Ratio

• measure a company’s income against its current debt load, but it does so by examining
monthly revenues and recurring monthly debts.
• Although this ratio is most often used by lending institutions to financially size up a personal
loan applicant, it can also be used by those same institutions to gauge a commercial firm’s
ability to remain solvent.

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Working Capital to Debt Ratio

• help you to evaluate a company’s ability to reduce or eliminate its debt.​

• The higher the ratio value, the more positive a feature this capability becomes for
any business you may wish to invest in, since it’s generally considered a sign of
good financial health

𝑊𝑜𝑟𝑘𝑖𝑛𝑔𝐶𝑎𝑝𝑖𝑡𝑎𝑙=𝐶𝑢𝑟𝑟𝑒𝑛𝑡
  𝐴𝑠𝑠𝑒𝑡𝑠 −𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
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 Current Cash Debt Coverage Ratio

• shows you a company's current operating cash flow (OCF) in relation to its current debt
obligations

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 Asset Coverage Ratio

• measurement used to determine a firm's ability to pay off or cover its debt given its
assets
• understand whether or not the company’s assets can cover any debts owed to you
and other investors.

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Interest Expense to Debt Ratio

• help us figure out the rate of interest a business is paying on its total debt

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Fixed Charge Coverage Ratio

• useful solvency ratio that tells us about the capability of the firm to repay its fixed charges when
they become due.

• A fixed charge can be any recurring expense such as mortgage payments, insurance, salaries, etc.
To remain in business, a firm needs to be able to meet these expenses.

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Capitalization Ratio

• To assess a company’s ability to financially support their growth and operations,

you can look to the capitalization ratio for insight
• gain perspective into how the company manages its leverage.

  𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑖𝑜= ′
𝐿𝑜𝑛𝑔 −𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 + 𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒 𝑟 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

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Debt to EBITDA Ratio

• EBITDA stands for Earnings before Interest, Taxes, Depreciation, and

Amortization
•  measures a company’s debt coverage (income vs. debt payments)
• EBITDA is measured on an annual basis (as it normally is), the ratio also
provides the approximate number of years required to pay off current total
debt.

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Net Debt to EBITDA Ratio

• essentially how many years it would take a company to pay back all its debts if its net
liabilities and EBITDA are held constant
• The net debt to EBITDA is a key profitability ratio for those who want to analyze the
creditworthiness of a business.

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Cash Flow Coverage Ratio

• simple calculation that you can use to assess a company’s ability to pay all of its interest
and fixed expenses
• focuses primarily on the capacity of a firm's cash flow to cover all non-expense items,
which contain payments for dividends, capital expenditures (CAPEX), and the principal
on debt
• useful when evaluating businesses that are quickly expanding their fixed assets bases or
businesses with heavy debt burdens

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Cash Debt Coverage Ratio

• Looks at the relationship between the operating cash flow of a company to its
total liabilities and implies what the actual ability of the business to pay back its
debt from its operation

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Equity Ratio

• Simple calculation that show how much of a company’s assets are funded by owner shares
• Measures investor commitment to a company in the form of equity invested in assets
• Inversely demonstrates the amount of those assets that are supported and financed by debt

 
𝑇𝑜𝑡𝑎𝑙 𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒 𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

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Debt to Net Worth Ratio

• Helps in evaluating the financial health of a given company by comparing the level of debt it has to its
total net worth
• ASSETS > LIABILITIES – Positive Net Worth
• ASSETS < LIABILITIES – Negative Net Worth
• Useful in determining how financially healthy a company is

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Long-Term Debt to Equity Ratio

• Throws light on the financial solvency of a company

 
𝐿𝑜𝑛𝑔 −𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
𝐿𝑜𝑛𝑔 −𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜= ′
𝑇𝑜𝑡𝑎𝑙 𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒𝑟 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

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Long Term Debt Ratio

• often known as the long-term debt to total asset ratio, essentially measures
the total amount of long term debt in relation to the total assets of a company
• fundamental figure you will want to know because balance is key here

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 Financial metrics used to determine a
debtor's ability to pay off current debt
obligations without raising external
capital.

LIQUIDITY RATIOS
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Cash to Current Assets Ratio

♥ Tells us what portion of total current assets is constituted by the most liquid assets
of the company - cash and cash equivalents and marketable securities.

Cash to Current Assets Ratio =

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Defensive Interval Ratio

♥ Tells us the number of days for which a business can continue operating
without using its non-current assets

Defensive Interval Ratio =

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Cash Coverage Ratio

♥ Examines only an organization’s available cash or cash equivalents.

♥ This ratio measures the actual amounts found in a company’s bank accounts, and held
in such investments as marketable securities that can be immediately converted into
cash

Cash Ratio =

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Cash to Working Capital Ratio

♥ A method for further defining a company’s ability to fund its short-term liabilities and
a useful for evaluating a potential investment.
♥ This can affect how likely a business is to be able to service its current debts

Cash to Working Capital Ratio =

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 Inventory to Working Capital Ratio

♥ The amount of current assets that a company has on hand at any given
time, in excess of its current liabilities.
♥ Allows you to calculate exactly what proportion of a business’s working
capital is tied up in its inventory, giving you a more accurate picture of
its liquidity position.

Inventory to Working Capital Ratio=

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Sales to Current Assets Ratio

♥ financial calculation that can help you determine how efficiently a company is
making use of its current assets to generate revenue.
♥ Best used to spot trends over a number of accounting periods for the same
company, or to compare multiple companies within the same industry.

Sales to Current Assets Ratio =

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Sales to Working Capital Ratio

♥ Shows  the amount of invested cash a company requires to maintain a certain level
of sales, as an investor you can use this liquidity ratio to analyze any changes in an
organization’s use of its cash over a period of time

Sales to Working Capital Ratio=

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Net Working Capital Ratio

♥ Gives a current picture of both its level of operational efficiency, and its short-term
financial health.
♥ Ideally, compare the net working capital from period to period, in order to
develop an idea of how proficiently a business is being run.

Net Working Capital Ratio =

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Cash to Current Liabilities Ratio

♥ Tells us about the ability of a company to settle its current liabilities

using only its cash and highly liquid investments

Cash to current liabilities ratio =

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Acid Test Ratio

♥ Takes the inventory value out of a company’s current assets. Inventory is sometimes
overstated, subject to several valuation issues and takes more time to convert into
cash than other current assets.

Acid Test Ratio =

Acid Test Ratio =

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 It shows the relationship between the market value of
a company or its equity and some fundamental
financial metric (e.g., earnings).
 The point of a valuation ratio is to show the price you
are paying for some stream of earnings, revenue, or
cash flow (or other financial metric)

BUSINESS
VALUATION RATIOS
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Price Earnings (P/E) Ratio

♥ Used by investors to figure out what price the market is willing to pay for shares of a particular company’s
stock.
♥ Evaluate what a stock is currently worth, and can also help you to predict what it could be worth based on
future earnings.

Price Earnings Ratio =

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Earnings per Share Ratio

♥ It is basically the amount of money a company earns during a specific period,

portioned out in terms of each outstanding share of common stock.
♥ Great indication of how profitable your company is.

Earnings per Share ratio =

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Price to Book Value (P/B) Ratio

♥  An important measure that is used to value a company’s stock. It compares the
market value of a company to the book value of each of its shares

Price to Book (P/B) Ratio =

 

Book Value per Share =

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Price to Sales Ratio

♥ The P/S ratio is used to evaluate a company's worth with respect to its trailing
twelve-month (TTM) sales.
♥ Taking the PSR of several comparable companies can highlight the potentially
undervalued ones

Price to Sales Ratio =

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Price to Cash Flow Ratio

♥ It can be utilized to discern which stocks are undervalued and overvalued

in various industries.

Price to Cash Flow Ratio =

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Cash Earnings per Share Ratio

♥ Gives a clearer insight because a company’s operating cash flow cannot be

manipulated so easily. So you’ll get a better understanding of exactly how
much the company has earned

Cash Earnings per Share Ratio =

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Cash Reinvestment Ratio

♥ Investors are keen to watch the fluctuations of a company’s cash reinvestment rate,
because it can be indicative of its long-term goals and strategies.

Cash Reinvestment ratio =

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Times Preferred Dividends Earned

♥ also known as the dividend coverage ratio, is a coverage ratio which measures a company’s
ability to pay its preferred stock dividend, based on its net income.
♥ Preferred stock holders, as well as common stock holders, use this ratio to gauge the
likelihood of a company missing its dividend payments

Times Preferred Dividends Earned =

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Dividend Yield Ratio

♥ Tells us the dividend that a company pays out to its investors relative to its share
price.
♥ It is often used by investors who are looking for continuous dividend income

 
Dividend Yield Ratio =
 
Dividends per share =
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Net Assets Value Per Share (NAVPS)

♥ Investors can use this measure to compare the value of a company’s stock to the
actual price it is being bought and sold at which can subsequently highlight good or
bad times to buy and sell providing an advantage to an investor looking for a
undervalued business

Net Assets Value per Share =

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 Efficiency ratios, also known as activity ratios, are used by analysts
to measure the performance of a company's short-term or current
performance.
 An efficiency ratio measures a company's ability to use its assets to
generate income.
 Efficiency and liquidity both play integral roles in determining
whether a firm will have the money to pay its bills on time and the
means to consistently support its regular business operations,
without additional funding.

EFFICIENCY RATIOS
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 ACCOUNTS PAYABLE TURNOVER RATIO

 This financial ratio allows you to compare a firm’s credit purchases against its average
accounts payable (AP) amount, in order to determine how frequently it pays its
suppliers.
 Accounts payable turnover rates are typically calculated by measuring the average
number of days that an amount due to a creditor remains unpaid.

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 ACCOUNTS RECEIVABLE TURNOVER RATIO

 The accounts receivable turnover ratio, which is often known as debtors turnover

ratio, allows you to calculate how often a business collects its outstanding customer
payments on an annual basis.​
 The ratio is used to measure how effective a company is at extending credits and
collecting debts.
 A high accounts receivable turnover ratio means efficient management of receivables

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TOTAL ASSET TURNOVER RATIO

 The total asset turnover ratio is one of the many efficiency ratios that let you evaluate
how well a company is using its assets to generate income.
 The higher the ratio is, the more efficiently a company is generating sales from its
asset base.

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 INVENTORY TURNOVER RATIO

 In measuring the rate at which a company’s merchandise is sold over a given period of
time, the inventory turnover ratio compares average inventory levels against 
cost of goods sold.
 Trading and manufacturing companies and companies that are dealing with highly
perishable products and those that are prone to technological obsolescence must pay
close attention to this ratio to minimize losses.

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 CASH FLOW TO SALES RATIO

 This ratio is used to compare a company’s sales revenues with its cash flow from
operations, thereby revealing how well the company can generate cash flows from its
sales.
 This ratio also will tell you if that business has any problems with its accounts
receivable.​

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SALES TO ADMINISTRATIVE EXPENSES RATIO

 The ratio will essentially tell you how much the company is spending in
order to maintain that level of sales volume

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 INVESTMENT TURNOVER RATIO

 The investment turnover ratio helps us measure the ability of a company to generate

revenues using the debt and capital that have been invested in the business.
 This ratio can take these aspects into account, thereby help you determine how well the
company is able to convert its shareholders’ equity and debt into sales.
 two ways a company can raise money to support its operations:
• debt financing
• equity financing

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 SALES TO EQUITY RATIO

 The sales to equity ratio is a simple calculation that can help you determine how efficient a company
is in utilizing its shareholders’ capital to generate sales.
 This ratio is normally used by investors to determine the amount of the company’s capital that should
be retained or kept within a business as sales volumes fluctuate.
 The net sales to equity ratio can also help you in determining if a company has too much equity which
could be utilized to pay extra dividends, perform stock buybacks, or provide benefits to shareholders
in other form of distribution.

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INVENTORY TO SALES RATIO

 This ratio establishes a relationship between a company’s sales and its

inventory.
 To be efficiently operational, a business has to maintain its inventory in such a
way that it never has either too much or too little of it in stock.

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SALES TO OPERATING INCOME RATIO

 This ratio works by measuring what proportion of a firm's sales revenue is

left over after paying for variable production costs such as raw materials,
wages, etc.
 The sales revenue to operating income ratio, in a way, tells you how efficient
the business model of a company is in generating profits.

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 A profitability ratio simply measures an organization’s
ability to generate profits from its regular business
operations.
 The profitability ratio can help you to measure business
income against various groupings of business expenses,
in order to better evaluate the level of a company’s
earnings.

PROFITABILITY
RATIOS
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 GROSS PROFIT MARGIN

 The gross profit margin ratio measures a firm’s revenues against the variable costs required to
produce those revenues, in order to determine the percentage of profits that are being generated.
 The ratio value demonstrates a company’s ability to operate cost-effectively, since the money that’s
available to fund operations and future growth comes in large part from the profits that are created
when goods or services are sold.

 
Gross Profit
Gross Profit Margin Ratio=
Net Sales

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 OPERATING PROFIT MARGIN RATIO

 This ratio will give you a middle-of-the-road view of how effective a company is at 
managing and controlling its expenditures as a whole.
 The operating margin ratio does better reflect a firm’s ability to control overall operational
costs than calculations that consider only those expenses directly related to the creation
or sale of goods or services.

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 NET PROFIT MARGIN

 The profit margin ratio demonstrates exactly what percentage of each sales
remains as profit after a company’s expenses have been paid.
 You can also use the net profit ratio to contrast and compare the commercial
performance of the business you’re interested in, with its closest competitors.

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RETURN ON NET ASSET RATIO

 The return on net assets ratio (RONA) is a financial performance measure

that shows a comparison of a firm's net income to its net assets.
 Generally, a higher result indicates that a company is making good use of its
working capital and fixed assets to generate income and thus implies a
higher profitability.

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RETURN ON ASSETS ( ROA)

 It measures net earnings against its total assets to determine just how successfully
it’s using its resources to profit from its regular business operations
 It can also indicate just how capable the company is of funding its own growth and
expansion.
 The return on total assets ratio should play a critical role in your 
evaluation of any potential investment.

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RETURN ON COMMON EQUITY RATIO

 This ratio is a great tool for keeping tabs on a business you already own shares in, or for
evaluating one you’re considering as an investment.
o Isolates Common equity Returns
o Can be used to evaluate dividends
o Evaluate management’s used of capital

  𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐶𝐸=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

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 RETURN ON INVESTED CAPITAL

 ROIC attempts to measure the returns earned on capital invested by a company

 This ratio is particularly useful when it’s used to compare with a company’s
weighted average cost of capital (WACC).

 
𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥
𝑅𝑂𝐼𝐶=
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

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RETURN ON REVENUE RATIO

 this ratio works by comparing the net income of a company to its total
revenue.
 this ratio is tied with the net profit, it also puts a significant impact on the
company’s earnings per share (EPS).

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 RETURN ON DEBT RATIO

 The return on debt (ROD), also known as the return on long-term liabilities, is

a metric that measures that amount of profit a company generates in relation
to the amount of debt it has on its balance sheet.
 it can provide useful information on companies who are highly levered
because it may show a company’s probability of defaulting.

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 OPERATING CASH FLOW MARGIN

 The operating cash flow margin is the percentage of a company’s earnings that

flows down into the operating cash flow.
 A high cash flow margin signifies an efficient business that doesn’t have excess
expenses, while a low operating cash flow margin could be a sign of
inefficiency.

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THANKS!
Dimaunahan, Rochelle M.
Lainez, Maria Andrea M.
Salva, Mary Cris B. 71