WEEK 6 (MODULE 4):

FINANCIAL RATIOS

MS. ALYSSA VILLORENTE

OLC
LESSON
OBJECTIVE:

In this lesson you will be able to compute,

analyze and interpret the basic types of financial
ratios.
RATIO

Ratio is a mathematical relationship between one number to another

number.
A mathematical yardstick that measures the relationship between two
figures or groups of figures which are related to each other and are
mutually interdependent.
WHAT IS FINANCIAL RATIO ANALYSIS?

Is a method or process by which the relationship of items or group

of items in the financial statements are computed, and presented.
It is used to interpret the financial statements so that the strengths
and weaknesses of a firm, its historical performance and current
financial condition can be determined.
 LIQUIDITY RATIO

The liquidity ratios answer the question of whether a business firm

can meet its current debt obligations with its current assets.
Current Ratio
Quick Ratio
 CURRENT RATIO

The current ratio is a liquidity that measures a firm's ability to pay

off its short-term liabilities with its current assets. The current ratio
is an important measure of liquidity because short-term liabilities are
due within the next year.
EXAMPLE:
Charlie's Cake Shop sells cakes and other pastries in their municipality.
Charlie is applying for loans to help fund his dream of building an
indoor skate rink. Charlie's bank asks for his balance sheet so they can
analysis his current debt levels. According to Charlie's balance sheet he
reported Php100,000 of current liabilities and only Php25,000 of
current assets. Charlie's current ratio would be calculated like this:
 QUICK RATIO

The quick ratio measures whether the firm can meet its short-term
debt obligations without selling any inventory.
EXAMPLE:
Carole's Clothing Store is applying for a loan to remodel the
storefront. The bank asks Carole for a detailed balance sheet, so it can
compute the quick ratio. Carole's balance sheet has Php21,500 total
current assets. There were Php5,000 inventories and the balance sheet
depicted a prepaid tax expense of Php500. In addition, she has
current liabilities worth Php15,000.
 ACTIVITY RATIO

This is also known as efficiency or turnover ratio for this measures

how effectively the firm is using its assets. This focus primarily on
how effectively the firm is managing two specific asset groups,
receivables and inventories, and its total assets in general.

Receivable Turnover
Payable Turnover
 RECEIVABLE TURNOVER RATIO

This ratio measures how many times a business can be able to

collect its average accounts receivable throughout the year.
EXAMPLE:
Bill's Grocery Store sells different types of merchandise that are
usually consumed by the people in their locality. At the end of the
year, Bill's balance sheet shows Php20,000 in accounts receivable,
Php75,000 of gross credit sales, and Php25,000 of returns. Last
year’s balance sheet showed Php10,000 of accounts receivable.
 PAYABLE TURNOVER RATIO

This is an activity ratio that shows a business entity’s ability

to pay off its accounts payable.
EXAMPLE:
BBB Construction Supplies buys constructions materials from wholesalers and
resells these inventories through its retail store. During the current year, the
entity purchased Php1,000,000 worth of construction materials. According to
the balance sheet of BB Construction Supplies, the beginning accounts payable
was Php55,000 and the ending accounts payable was Php958,000.
 PROFITABILITY RATIO

These are ratios that relate profits to sales and investment. From word
its self, this ratio deals with profitability.

Gross Profit Margin

Net Profit Margin
 GROSS PROFIT MARGIN

This financial ratio measures how profitable a business entity is at

selling its merchandise.
EXAMPLE:
Assume John’s Apparel is a business engaged in selling clothings
and
accessories. It paid Php100,000 on inventory bought for the year.
The
business was able to sell all of the inventory for Php450,000.
 NET PROFIT MARGIN

Trisha's Tackle Shop is an outdoor fishing store that selling lures

and
other fishing gear to the public. Trisha's net sales were Php1,000,000
and her net income was Php100,000.
EXAMPLE:
Trisha's Tackle Shop is an outdoor fishing store that selling lures and
other fishing gear to the public. Trisha's net sales were Php1,000,000
and her net income was Php100,000.
 LEVERAGE RATIO

This measures the long-term obligation of the business. Leverage

ratios helps you understand how the long-term funds are used by the
business entity.
Debt to Equity Ratio
Debt to Total Assets Ratio
 DEBT TO EQUITY RATIO

The debt to equity ratio is a liquidity ratio that compares the total
debt to the total equity of a business entity. The debt to equity ratio
shows the percentage of entity’s financing that comes from creditors
and investors.
EXAMPLE:
A company has loans amounting to Php600,000 and the equity of the
company is Php1,200,000.
 DEBT TO TOTAL ASSETS RATIO

The debt to asset ratio is a leverage ratio that measures the amount
of total assets that are financed by creditors. This can also depict the
percentage of assets that were paid with loans or credits. This may
also provide a measure of the business entity’s ability to meet its
financial obligations.
EXAMPLE:
Mark’s Auto Shop is an automotive repair shop in the locality.
Currently, Ted has Php100,000 assets and Php50,000 liabilities.