FINANCIAL RATIOS

(1) Liquidity Ratios:

A - Current ratio = Current assets / Current

Liabilities
If x/y =2
Every unit of the denominator (liab.) is covered /backed up /
financed / yield by 2 unit of the nominator (asset)
B - Quick or Acid ratio = (Current assets – Inventory)
/ Current Liabilities
C- Cash ratio = (CA – INV. – AR – S.T. Invest) or cash
in kind / CL
Liquidity of AR:
- Average Collection Period (ACP) = (Balance of AR X 360) /
Credit Sales
If credit sales not given, assume all sales are on credit

Liquidity of Inventory:
- Average selling Period (ASP) + Average Collection Period
(ACP)
ASP = (Inventory X 360) / COGS
The larger the Liquidity of INV, the greater the need for cash
to finance operations
 Condition for using ratios
1) Current ratios = both ACP + ASP can be
liquidated in less than 360 days for a good
ratio.
2) Quick ratio = liquidation of AR (ACP) < 360
Liquidation of Inventory > 360
3) Cash ratio = ACP > 360
ASP > 360
 (2) Debt Management Ratios:
A - Debt ratio = Total Debts / Total assets
B - Debt / Equity ratio = Total Debts / Equity

The Higher the ratios the more risky the Company is

C - Capital structure ratio (CSR) = LTL / (LTL + ME)

D - Interest Coverage Ratio = EBIT (Earning before
Interest & Tax) / I
(3) Assets utilization / management (activity /efficiency ratios):

A - Total Assets Turnover (TAT) = Sales / Total assets

B - Fixed Assets Turnover (FAT) = Sales / FA
C - Current Assets Turnover (CAT) = Sales / CA
:For
Cash To = Sales / Cash )1(
AR To = Credit Sales / AR )2(
Inventory To = COGS / Inventory )3(
To = Turnover
D & E - Liquidity of AR & Liquidity of Inventory;
Same as before
 (4) Profitability ratios:
A- sales:
1) GPM gross profit margin = GP / sales
2) OIM operating income margin = OI / sales =
( Sales-COGS -Others) / sales
3) NIM net income margin = NI / Sales

B- Financial performances:
Return on assets (investment) ROI = EBIT / Total Assets
Return on Equity (ROE) = EBT / Equity

C- ROBF = {ROI – (Interest / BF) {x (BF/OE)

D- ROE = ROI + ROBF

 Dupont system of ratios
(ROI= EBIT/Total assets) x sales / sales
ROI =EBIT/Sales x Sales/ Total assets

Net Profit
ROI = Margin
x TATO

Profitability x Efficiency
 Modern tech. of analysis

EVA
MVA Economic value added=NP - total cost
Market value added = of capital
(No. of shares x Long term bonds :Interest
Preferred shares : p.s. dividends
market value of shares) – Common shares : dividends
total O/E R/E : assuming in the bank / opp. Cost =
10%