FINANCIAL

RATIOS by:
Jamnague, Cyrene
Regis, Claire
Breboneria, Eric
Titco, Seanrell
Mañoso, Eric
Sanquina, Patrick John
Teodoro, Jeff
Cabias, John Ernest
WHAT ARE FINANCIAL
RATIOS?
Financial ratios are basic calculations using quantitative
data from a company’s financial statements.
They are used to get insights and important information on
the company’s performance, profitability, and financial
health.
Common financial ratios come from a company’s balance
sheet, income statement, and cash flow statement.
Businesses use financial ratios to determine liquidity, debt
concentration, growth, profitability, and market value.
LIQUIDITY RATIOS
Companies use liquidity ratios to measure working capital
performance – the money available to meet your current,
short-term obligations .

Simply put, companies need liquidity to pay their bills. Liquidity

ratios measure a company’s capacity to meet its short-term
obligations and are a vital indicator of its financial health.
 DIFFERENT FORMS OF
LIQUIDITY RATIO
CURRENT RATIO:
CURRENT ASSETS / CURRENT LIABILITIES
The current ratio measures how a business’s current
assets, such as cash, cash equivalents, accounts
receivable, and inventories, are used to settle current
liabilities such as accounts payable.
 DIFFERENT FORMS OF
LIQUIDITY RATIO
QUICK RATIO (ACID-TEST RATIO):
CURRENT ASSETS – INVENTORIES / CURRENT LIABILITIES
Also known as the acid-test ratio, the quick ratio measures how a business’s
more liquid assets, such as cash, cash equivalents, and accounts receivable
can cover current liabilities. This ratio excludes inventories from current
assets. A quick ratio of 1 is considered the industry average. A quick ratio
below 1 shows that a company may not be in a position to meet its current
obligations because it has insufficient assets to be liquidated.
 DIFFERENT FORMS OF
LIQUIDITY RATIO
CASH RATIO:
CASH AND CASH EQUIVALENTS / CURRENT LIABILITIES
The cash ratio measures a business’s ability to use
cash and cash equivalent to pay off short-term
liabilities. This ratio shows how quickly a company
can settle current obligations.
LEVERAGE RATIOS
Companies often use short and long-term debt to finance business
operations. Leverage ratios measure how much debt a company has.
Molson Coors Beverage Co. , the maker of Coors Light and Miller Lite
beer for instance, had been saddled with debt, after an acquisition in
the industry according to the Wall Street Journal. Its CFO Tracey
Joubert signaled to the market the company’s plans “reduce its
leverage ratio to below 3 times by the end of this year.”
 DIFFERENT TYPES OF
LEVERAGE RATIO
DEBT RATIO:
TOTAL DEBT / TOTAL ASSETS
The debt ratio measures the proportion of debt
a company has to its total assets. A high debt
ratio indicates that a company is highly
leveraged.
 DIFFERENT TYPES OF
LEVERAGE RATIO
DEBT TO EQUITY RATIO:
TOTAL DEBT / TOTAL EQUITY
The debt-to-equity ratio measures a company’s debt
liability compared to shareholders’ equity. This ratio is
important for investors because debt obligations often
have a higher priority if a company goes bankrupt.
 DIFFERENT TYPES OF
LEVERAGE RATIO
INTEREST COVERAGE RATIO:
OPERATING INCOME / INTEREST EXPENSES
Companies generally pay interest on corporate debt.
The interest coverage ratio shows if a company’s
revenue after operating expenses can cover interest
liabilities.
EFFICIENCY RATIOS
Efficiency ratios show how effectively a company uses
working capital to generate sales. For instance an analyst
reported that Seattle-based bank Washington Federal’s
company’s efficiency ratio was 58.65%, down from 59.02%
recorded a year ago. A fall in efficiency ratio indicates
improved profitability.
 SEVERAL WAYS TO ANALYZE
EFFICIENCY RATIOS
ASSET TURNOVER RATIO:
NET SALES / AVERAGE TOTAL ASSETS
Companies use assets to generate sales. The asset
turnover ratio measures how much net sales are made
from average assets.
 SEVERAL WAYS TO ANALYZE
EFFICIENCY RATIOS
INVENTORY TURNOVER:
COST OF GOODS SOLD / AVERAGE INVENTORY
For companies in the manufacturing and production
industries with high inventory levels, inventory turnover is
an important ratio that measures how often inventory is
used and replaced for operations.
 SEVERAL WAYS TO ANALYZE
EFFICIENCY RATIOS
DAYS SALES IN INVENTORY RATIO:
365 DAYS / INVENTORY TURNOVER RATIO
Holding inventory for too long may not be efficient. The
day sales in inventory ratio calculates how long a
business holds inventories before they are converted to
finished products or sold to customers.
 SEVERAL WAYS TO ANALYZE
EFFICIENCY RATIOS
PAYABLES TURNOVER RATIO:
COST OF GOODS SOLD (OR NET CREDIT PURCHASES) /
AVERAGE ACCOUNTS PAYABLE
The payables turnover ratio calculates how quickly a
business pays its suppliers and creditors.
 SEVERAL WAYS TO ANALYZE
EFFICIENCY RATIOS
DAYS PAYABLES OUTSTANDING (DPO):
(AVERAGE ACCOUNTS PAYABLE / COST OF GOODS SOLD) X
NUMBER OF DAYS IN ACCOUNTING PERIOD (OR YEAR)
This ratio shows how many days it takes a company to pay off suppliers and
vendors. A lower days payables outstanding implies that a business is
letting go of cash too quickly and may not be taking advantage of longer
credit terms. On the other hand, when the DPO is too high, it means a
company delays paying its suppliers, which can lead to disputes.
 SEVERAL WAYS TO ANALYZE
EFFICIENCY RATIOS
RECEIVABLES TURNOVER RATIO:
NET CREDIT SALES / AVERAGE ACCOUNTS RECEIVABLE
Accounts receivables are credit sales made to customers. It is important that
companies can readily convert account receivables to cash. Slow paying
customers reduce a business’s ability to generate cash from their accounts
receivable.
The receivables turnover ratio helps companies measure how quickly they turn
customers’ invoices into cash. A high receivables turnover ratio shows that a
company quickly generates cash from accounts receivables.
PROFITABILITY RATIOS
A business’s profit is calculated as net sales less expenses.
Profitability ratios measure how a company generates profits
using available resources over a given period. Higher ratio results
are often more favorable, but these ratios provide much more
information when compared to results of similar companies, the
company’s own historical performance, or the industry average.
 MOST COMMON
PROFITABILITY RATIOS
GROSS MARGIN:
GROSS PROFIT / NET SALES
The gross margin ratio measures how much profit a business
makes after the cost of goods and services compared to net
sales. Comparing companies can be illustrative – such as finding
that Home Depot has a 33.6% gross profit margin versus
Walmart’s 25.1%.
 MOST COMMON
PROFITABILITY RATIOS
OPERATING MARGIN:
OPERATING INCOME / NET SALES
The operating margin measures how much profit a
company generates from net sales after accounting for
the cost of goods sold and operating expenses.
 MOST COMMON
PROFITABILITY RATIOS
RETURN ON ASSETS (ROA):
NET INCOME / TOTAL ASSETS
Companies use the return on assets ratio to determine
how much profits they generate from total assets or
resources, including current and noncurrent assets.
 MOST COMMON
PROFITABILITY RATIOS
RETURN ON EQUITY (ROE):
NET INCOME / TOTAL EQUITY
Shareholders’ equity is capital investments. The return on equity
measures how much profit a business generates from
shareholders’ equity. For instance a company with a declining
ROE could be seen as having more risk than a company in the
same industry with an increasing ROI.
MARKET VALUE RATIOS
Market value ratios are used to measure how valuable a
company is. These ratios are usually used by external
stakeholders such as investors or market analysts but can
also be used by internal management to monitor value per
company share.
 MOST COMMON
MARKET VALUE RATIOS
EARNINGS PER SHARE RATIO (EPS):
NET EARNINGS / TOTAL SHARES OUTSTANDING
The earnings per share ratio, also known as EPS, shows how
much profit is attributable to each company share.
 MOST COMMON
MARKET VALUE RATIOS
PRICE EARNINGS RATIO (P/E):
SHARE PRICE / EARNINGS PER SHARE
The PE ratio is a key investor ratio that measures how valuable a
company is relative to its book value earnings per share.
 MOST COMMON
MARKET VALUE RATIOS
BOOK VALUE PER SHARE RATIO:
TOTAL EQUITY – PREFERRED EQUITY / TOTAL
SHARES OUTSTANDING
A company’s common equity is what common shareholders own after all
liabilities and preference shares have been settled from total assets.
The book value per share measures the value per share for common equity
owners based on the balance sheet value of assets less liabilities and preference
shares.
 MOST COMMON
MARKET VALUE RATIOS
DIVIDEND YIELD RATIO:
DIVIDEND PER SHARE / SHARE PRICE
The dividend yield ratio measures the value of a company’s dividend per share
compared to the market share price.
When companies pay out dividends to shareholders, the value of dividends
received for each share owned is known as the dividend per share. Shareholders
and analysts compare the dividend per share to the company’s share price using
the dividend yield ratio.