Financial Ratios types, purpose, advantages, limitations and detailed formulas of each type.

2. FINANCIAL RATIO

3. Presenters
• BBSSagar Bajaj
• BBSOsama Rajput
• MBA-72Mohsan Patoli
• MBA-72Muzzamil Shaikh

5. FINANCIAL RATIO
• A financial ratio (or accounting ratio) is
a relative selected
numerical
magnitude
values
of two
taken from an
enterprise's financial statement.

6. SOURCES OF DATA FOR
FINANCIAL RATIOS
• Balance Sheet
• Income Statement
• Statement of Cash Flow
• Statement of Retained Earnings

7. TYPES OF RATIOS
• Liquidity ratios
• Asset turnover ratios
• Financial leverage ratios
• Profitability ratios
• Dividend policy ratios

8. PURPOSE OF RATIOS
Financial ratios allow for comparisons
• between companies
• between industries
• between different time periods for one company
• between a single company and its industry
average

9. LIQUIDITY RATIOS
Provides information about a firm’s ability to meet
its short–term financial obligations.
• Current Ratio
• Quick Ratio

10. CURRENT RATIO
Current Assets
CURRENT RATIO =
Current Liabilities
Looks at the ratio between current assets and current
liabilities.

11. QUICK RATIO
Is similar to the current ratio but it excludes inventory
from current assets.
Current Assets - Inventory
QUICK RATIO =
Current Liabilities

12. LIQUIDITY RATIOS
According to company financial statement they
are in Strong Liquidity position but their liquidity
position is not as good as they stated. Company
liquidity position appear to have remain stable
but below acceptable criteria. Company may
have problem to satisfy its short term obligations
when they come due. But, it is also a fact that
company do not have pay all its short term
obligations at the same time so company should
manage to pay its short liabilities

14. ASSET TURNOVER RATIO
• Receivable Turnover
• Average Collection Period
• Inventory Turnover
• Inventory Period
Indicates of how efficiently the firm utilizes its
asset.

15. RECEIVABLE TURNOVER
Annual Credit Sales
RECEIVABLE TURNOVER =
Accounts Receivable
Indicates the firm’s efficiency to use assets for
generating sales.

16. AVERAGE COLLECTION PERIOD
Shows the time needed to collect accounts receivables.
Accounts Receivable
AVERAGE COLLECTION PERIOD=
Annual Credit Sales / 365
365
AVERAGE COLLECTION PERIOD=
Receivable Turnover

17. INVENTORY TURNOVER
Cost of Goods Sold
INVENTORY TURNOVER =
Average Inventory
Measures the activity of a firm’s inventory

18. INVENTORY PERIOD
Shows the time needed to pay accounts payables.
Average Inventory
INVENTORY PERIOD =
Annual Cost of Goods Sold / 365
365
INVENTORY PERIOD =
Inventory Turnover

20. DEBT MANAGEMENT RATIOS
Provide an indication of the long-term
solvency of the firm.
• Debt Ratio
• Debt Equity Ratio
• Interest Coverage
• Book Value

21. DEBT RATIO
Measures the proportion of total assets financed by
the firm’s creditor
Total Debt
DEBT RATIO =
Total Assets

22. DEBT EQUITY RATIO
The debt-to-equity ratio (D/E) is a financial ratio
indicating the relative proportion of shareholders'
equity and debt used to finance a company's
assets.
Total Debt
DEBT EQUITY RATIO =
Total Equity

23. INTEREST COVERAGE
Measures the firm’s ability to make contractual interest
payments. It is also called Interest Coverage Ratio.
EBIT
INTEREST COVERAGE =
Interest Charges
EBIT= Earning before interest and tax

24. BOOK VALUE
The value of a security or asset as entered in a
firm's books
Total owner’s equity
BOOK VALUE PER SHARE =
No: of share outstanding

26. PROFITABILITY RATIO
• Gross Profit Margin
• Working Capital
• Return on Asset
• Return on Equity
Measures the firms’ profits with the given level of sales

27. GROSS PROFIT MARGIN
It is a measure of the gross profit earned on sales.
Sales – Cost of Goods Sold
GROSS PROFIT MARGIN =
Sales
Net Income
GROSS PROFIT MARGIN =
Sales

28. WORKING CAPITAL
Working capital is a financial metric which represents
operating liquidity available to a business
WORKING CAPITAL = Current Asset - Current Liability

29. RETURN ON ASSETS
Return on assets (ROA) is a financial ratio that shows
the percentage of profit a company earns in relation to
its overall resources. It is commonly defined as net
income divided by total assets. Net income is derived
from the income statement of the company and is the
profit after taxes.
Net Income
RETURN ON ASSETS =
Total Assets

30. RETURN ON EQUITY
In corporate finance, the return on equity (ROE) is
a measure of the profitability of a business in relation
to the book value of shareholder equity, also known
as net assets or assets minus liabilities. ROE is a
measure of how well a company uses investments to
generate earnings growth.
Net Income
RETURN ON EQUITY=
Shareholder Equity

31. DIVIDEND POLICY RATIO
• Dividend Yield Ratio
• Dividend Payout Ratio

32. DIVIDEND YIELD RATIO
The dividend yield is a financial ratio that measures
the amount of cash dividends distributed to common
shareholders relative to the market value per share.
Dividends Per Share
DIVIDEND YIELD =
Share Price

33. DIVEDEND PAYOUT RATIO
The dividend payout ratio is the amount of dividends
paid to stockholders relative to the amount of total
net income of a company.
Dividends
PAYOUT RATIO =
Net Income
Dividends Per Share
PAYOUT RATIO =
Earnings Per Share

34. ADVANTAGES OF RATIO
 Forecasting and Planning
 Budgeting
 Measurement of Operating Efficiency
 Communication
 Control of Performance and Cost
 Inter-firm Comparison

35. ADVANTAGES OF RATIO
 Indication of Liquidity Position
 Indication of Long-term Solvency Position
 Indication of Overall Profitability
 Signal of Corporate Sickness
 Aid to Decision-making
 Simplification of Financial Statements

36. LIMITATIONS OF RATIO
 Historical Information
 Different Accounting Policies
 Lack of Standard of Comparison
 Changes in Price Level
 Seasonal Factors Affect Financial Data
 A reference point is needed