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Financial RatiosFinancial Ratios
Analyzing How a BusinessAnalyzing How a Business
Why Do Ratio Analysis?Why Do Ratio Analysis?
Where Do I Get MyWhere Do I Get My
Information FromInformation From
Financial StatementsFinancial Statements
Balance SheetBalance Sheet
Income StatementIncome Statement
Types of RatiosTypes of Ratios
Measures how well a company can satisfy itsMeasures how well a company can satisfy its
Measures how much profit the companyMeasures how much profit the company
generates based upon its sales.generates based upon its sales.
Measures how well a company uses its assetsMeasures how well a company uses its assets
to generate income.to generate income.
Analyze TrendsAnalyze Trends
Look at a minimum of two years to see howLook at a minimum of two years to see how
the company is performing. Three years orthe company is performing. Three years or
more is beneficial.more is beneficial.
Industry StandardsIndustry Standards
How the company is performing against otherHow the company is performing against other
companies within the same industry.companies within the same industry.
Liquidity RatiosLiquidity Ratios
Tells us if a company can meet their currentTells us if a company can meet their current
liabilities with their current assets.liabilities with their current assets.
Current RatioCurrent Ratio
Current Assets divided by Current LiabilitiesCurrent Assets divided by Current Liabilities
Current AssetsCurrent Assets
Quick RatioQuick Ratio
Quick Assets divided by Current LiabilitiesQuick Assets divided by Current Liabilities
Quick Assets = Current Assets less StockQuick Assets = Current Assets less Stock
Some assets are not that liquid – especiallySome assets are not that liquid – especially
Think how long it has taken Circuit City andThink how long it has taken Circuit City and
Home Depot Expo to conduct theirHome Depot Expo to conduct their
liquidation sale.liquidation sale.
What Does This MeanWhat Does This Mean
In generalIn general
Current Ratio should be 2 or moreCurrent Ratio should be 2 or more
Quick Ratio should be at least 1Quick Ratio should be at least 1
Indicates that the company has money leftIndicates that the company has money left
over to work with once it has satisfied itsover to work with once it has satisfied its
current liabilities.current liabilities.
Working CapitalWorking Capital
Not a Ratio but a dollar figure – how muchNot a Ratio but a dollar figure – how much
money is left after our Current Assets aremoney is left after our Current Assets are
used to satisfy our Current Liabilites.used to satisfy our Current Liabilites.
Sales Revenue (Turnover) will always be theSales Revenue (Turnover) will always be the
denominator used.denominator used.
Gross Profit MarginGross Profit Margin
Measures how much money a company netsMeasures how much money a company nets
after it sells its inventory.after it sells its inventory.
Helps the company to determine if its pricingHelps the company to determine if its pricing
is adequateis adequate
Net Profit MarginNet Profit Margin
Net Income divided by Sales RevenueNet Income divided by Sales Revenue
Measures how much profit a company makesMeasures how much profit a company makes
as a percentage of salesas a percentage of sales
Efficiency RatiosEfficiency Ratios
Debtor DaysDebtor Days
Measures how timely a company collects itsMeasures how timely a company collects its
outstanding Trade Debts.outstanding Trade Debts.
Debtors divided by Sales times 365.Debtors divided by Sales times 365.
Inventory Turnover RateInventory Turnover Rate
Measures how many times a companyMeasures how many times a company
replaces the dollar value of its inventory.replaces the dollar value of its inventory.
Inventory divided by Sales times 365Inventory divided by Sales times 365
What to Look ForWhat to Look For
Trade Debtors TurnoverTrade Debtors Turnover
The longer debt is outstanding the longer theThe longer debt is outstanding the longer the
company does not have use of the moneycompany does not have use of the money
Inventory TurnoverInventory Turnover
Each industry will have its own generalEach industry will have its own general
standard. How does this companystandard. How does this company
compare? How have the ratios changedcompare? How have the ratios changed
over the years.over the years.