Financial ratios are relationships determined
from a company's financial information and used
for comparison purposes.
Four main categories
1) Solvency or Leverage
Debt Ratio - measures the portion of a company's capital
that is provided by borrowing.
Debt to equity ratio - indicates the relative mix of the
company's investor-supplied capital.
Debt to capital ratio - measures a company's capital
structure, financial solvency, and degree of leverage.
Debt / (Shareholder's Equity + Debt)
Current ratio - measures the ability of an entity to pay its
Current Assets / Current Liabilities
Quick ratio (or "acid test") - provides a stricter definition of
the company's ability to make payments on current
Quick Assets (cash, marketable securities, and
receivables) / Current Liabilities
Cash ratio - another measurement of a company’s liquidity
and their ability to meet their short-term obligations.
(cash + marketable securities) / current liabilities
Return on Equity - indicates how well the company is
utilizing its equity investment.
Net Income / Owners' Equity
Return on assets - indicates how effectively the company is
deploying its assets.
Net Income/Total Assets
Net profit margin - a company’s bottom line after all other
expenses, including taxes and one-off oddities, have been
taken out of revenue.
Net income or profits / Total Revenue
Inventory turnover ratio - shows the portion of assets
tied up in inventory. Generally, a lower ratio is
Inventory / Total Assets
receivable turnover ratio - gives a measure of how quickly
credit sales are turned into cash.
Net (credit) Sales/Average Accounts Receivable
1. Debt to Equity Ratio
-- indicates the relative mix of the
company's investor-supplied capital. A
company is generally considered safer if it
has a low debt to equity ratio—that is, a
higher proportion of owner-supplied
capital—though a very low ratio can
indicate excessive caution.
2. Current Ratio
--measures the ability of an entity
to pay its near-term obligations. A
lower current ratio means that the
company may not be able to pay its
bills on time, while a higher ratio
means that the company has money in
cash or safe investments that could be
put to better use in the business.
3. Quick Ratio
provides a stricter definition of the
company's ability to make payments
on current obligations. Ideally, this
ratio should be 1:1. If it is higher, the
company may keep too much cash on
hand or have a poor collection
program for accounts receivable. If it
is lower, it may indicate that the
company relies too heavily on
inventory to meet its obligations.
4. Return on Equity
ROE reveals how much profit a
company earned in comparison to
the total amount of shareholder
equity found on the balance sheet.
Shareholder equity is equal to total
assets minus total liabilities.
5. Net Profit Margin
The net profit margin is important to
evaluate in lending decisions because it
effectively shows the firm’s potential net
worth based on earnings. This has a direct
effect on capital reserves, which means
the higher the profit margin, the more
likely the business will be able to remain
resilient in periods of unexpected losses.
Almencion, Ronnel C.
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