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BY DANIAL REZA
LIQUIDITY MEASUREMENT RATIOS:
Liquidity ratios are being used to know the ability of the firm to meet its short-term borrowing. They compare short
term obligations to short term resources available to meet these obligations. By calculating the liquidity ratios, we
can get the insight into the present solvency of the firm and the firm’s ability to remain solvent in the adverse &
crisis.
Generally, the more liquid asset the better it is which shows company can pay its debts that are going to during near
future and can still fund its on going operations.
1-Current Ratio:
Current ratio tells us how a business entity capable of paying its debts in next 12 months by utilizing its current assets.
Higher the current ratio the more is the firm’s ability to meet its short-term liabilities.
Acid test ratio, shows the ability of a firm to its obligations after excluding the least liquid portion of current asset.
Quick ratio is the more conservative measure of liquidity.
3- Cash Ratio
The cash ratio is a measurement of a company's liquidity. It specifically calculates the ratio of a company's
total cash and cash equivalents to its current liabilities.
These ratios measure the percentage of profit at different four levels i.e., gross profit, operating profit, pre-tax profit and
profit after interest and tax. Purpose of this analysis is to measure the positive or negative and consistency of earning
trends.
Gross profit margin is a metric analysts use to assess a company's financial health by calculating the amount of money
left over from product sales after subtracting the cost of goods sold (COGS). Sometimes referred to as the gross margin
ratio, gross profit margin is frequently expressed as a percentage of sales.
Operating Margin
The operating margin measures how much profit a company makes on of sales after paying for variable costs of
production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s
operating income by its net sales.
The pretax profit margin is a financial accounting tool used to measure the operating efficiency of a company. It is a
ratio that tells us the percentage of sales that has turned into profits or, in other words, how many rupee of profit the
business has generated for each sale before deducting taxes.
The net profit margin, or simply net margin, measures how much net income or profit is generated as a percentage of
revenue.
Return ratios are a subset of financial ratios that measure how effectively an investment is being managed. They help to
evaluate if the highest possible return is being generated on an investment. In general, return ratios compare the tools
available to generate profit, such as the investment in assets or equity to net income.
Return on Assets (ROA)
The term return on assets (ROA) refers to a financial ratio that indicates how profitable a company is in relation to its
total assets. Corporate management, analysts, and investors can use ROA to determine how efficiently a company uses
its assets to generate a profit.
= Net Income / Total Assets
Return on Equity (ROE)
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders'
equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net
assets.
= Net Income / Shares Holder Equity
= Earning Before Interest & Tax (EBIT) / Capital Employed (Total Assets – Current Liabilities)
Return Ratios
Return Ratios
ROA ROE ROCE
40%
Net Income PKR 15,801,848.00
20%
Total Assets PKR 213,965,354.00
7% 29% 29%
Total Shareholders Equity PKR 54,011,076.00 0%
Debt Liabilities PKR - ROA ROE ROCE