THEME:

RATIOS
FINANCIAL

Eng. VÍCTOR LEYTON

 Concept

Financial ratios (also called financial reasons or ...

financial indicators), are coefficients or ratios that
they provide accounting and financial measurement units and
comparison, through which, the relationship (by division) between
yes, two direct financial data allow analyzing the state
current or past of an organization, based on optimal levels
defined for her.
Regarding the comparison of the data, it must meet certain
conditions:

The financial data that is related must correspond to the same

moment or period in time.
There must be an economic, financial, and administrative relationship between the
quantities to compare.
The units of measurement in which the quantities are expressed
Both pieces of data to be related must be consistent with each other.
 CALCULATION AND USAGE CHARACTERISTICS

Financial ratios are calculated from two or more numbers obtained from the
financial statements of companies. These numbers can be obtained from
Balance or Statement of Results. They can be obtained less frequently at
starting from the Statement of Net Equity or the Statement of Cash Flows
Cash.
These ratios are used by:

The debt issuers to analyze credit risk.

Executives of the company itself to evaluate employee performance
(stock options) or projects.
Stock investors who using Fundamental Analysis try to
select the values with the best prospects.
The ratios quantify numerous aspects of the business, but they should not be
to be used individually without considering the financial statements.
Rather, they should be an integral part of the analysis of financial statements.
The results of a ratio will suggest the question "why?", and the answer
would stem from a deeper or more global analysis concerning the company that
was being analyzed.
Ratios allow us to make comparisons:

Between companies.
Between sectors of activity (e.g. banking and petrochemicals).
Between different time periods of the same organization.
Between a company and the average of its sector of activity.

It can be reliable to compare ratios of companies in different sectors of activity.

different, facing different risks, different asset structure and different
competition.
 The ratios are classified into:

LIQUIDITY SOLIDITY Profitability ACTIVITY Solvency

 1. LIQUIDITY RATIOS

1.1 Current Ratio (CR)

Indicate the degree (number of times) by which the rights of creditors, in the short term,
term, are covered by the assets that are converted into cash (Assets
Current assets) in a period, more or less, equal to the maturity of the obligations.
Current Ratio = Current Assets / Current Liabilities Current Ratio = CA/CL

Analysis criterion:

If the RC is less than 1.5, the company may have a higher probability of suspending payments.
of obligations to third parties (creditors). If RC > 2.0, it can be said that the
the company has idle current assets. This indicates a loss of profitability.
short term.
 1.2 Acid Test or Reason (RA)

Measure the most immediate capacity that a company has to face its
short-term commitments. It differs from the current ratio because it eliminates the
less liquid items, that is, the characteristics within a Balance Sheet
that become less likely to transform into capital or circulating.

Formula 1:

Prueba Ácida = (Caja + Bancos + inversiones + cuentas por cobrar comerciales

(various accounts receivable) / Current Liabilities
Formula 2:

Razón Ácida = (Activo Circulante - Inventario)/Pasivo Circulante Razón Ácida =

RA= (AC−I) /PC

Analysis criterion:

Optimal: ~1 (close to 1).

If RA < 1, the company could suspend its payments or obligations to third parties.
for having insufficient liquid (current) assets. If RA > 1, it indicates the
possibility that the company has excess liquidity, resulting in a loss
of profitability.
 1.3 Cash Ratio (CR)

Reason that relates to the temporary financial investments that a company can
convert to cash in 1 or 2 days, which excludes those bank accounts that do not
they are freely available as they are subject to warranty.

Its formula:
Cash / Current Liabilities = Rf = Ef / CL

Analysis criterion

Optimal = 0.3.
For every monetary unit owed, there are 0.3 monetary units of
cash within 2 or 3 days.
 1.4 Net Working Capital over total assets (K/AT)

Measure the relationship of working capital, K = AC - PC (the money owned)

company to work for, whether in Cash, Current Accounts, Accounts Receivable in
1 year, that is, in the Short Term), after having paid off their debts in the Short Term
(Current Liabilities) with its available assets.
Formula (calling K the working capital):

K = (Current Assets - Current Liabilities) / Total Assets = (CA - CL) / TA

Analysis criterion:

Optimum must be >0.

A relatively low ratio could indicate relatively low liquidity levels.
It depends on the sector in which the company operates.
 1.5 Net Working Capital over Short-Term Debts (or Current Liabilities)
(K/PC)

It is the surplus that a company has, which states that for every monetary unit
What is owed in the Short Term amounts to 0.5 monetary units, and also a
unit.
 1.6 Measurement Days of the Time Interval (DMIT)

It indicates the time interval in which a company can continue operating,

if it were, for any kind of eventuality, halted in its activities
daily.

Formula:

(Current Assets / Cost of Sales) * 365 = (CA/CS) * 365

Example: If DMIT = 1120.87

1120.87 / 365 ≈ 3.071 (this indicates 3 years)
0.071 * 365 ≈ 26 days
Finally: DMIT = 1120.87, would not indicate that this 'company' can continue
functioning for approximately 3 years and 26 days.
 2. SOLIDITY OR LEVERAGE INDICES
FINANCIAL

Measure the level of indebtedness and the economic backing that a company has to
to face their medium and long-term debts.
Measures the capacity, in the Long Term, of a company to face its
obligations. Indicate the degree of commitment existing between the investments
made and the assets of a company.
2.1. Indebtedness ratio (IR)

Indicate the degree of indebtedness of a company, in relation to the Assets of the

company.
Formula
TotalDebt = CurrentLiabilities + LongTermLiabilities
RE = (Current Liabilities + Long-Term Liabilities) / Total Assets RE = (CL + LTL) /
At Optimal analysis criterion: 0.4 < RE < 0.6.
If > 0.6 means that the company is losing financial autonomy before
third parties. If < 0.4 the company may have an excess of equity (it
It is advisable to have a certain proportion of debt) Complementing the criterion
Before, it can be said, maintaining the 'optimal' relationship that:
For every monetary unit received by the company, 0.6 monetary units
they correspond, and are financed, to short-term and long-term debt, while
0.4 monetary units are financed by the equity capital of this one (i.e., the
shareholders). Another possible way of equivalent interpretation could be:
60% of the total assets has been financed by short-term and long-term creditors.
deadline.
2.2. Short-Term Solvency or Liquidity Reasons

They measure the company's monetary availability to meet its obligations.

in the short term. Its importance is 10%.

Formula
(cash availability + current credits) / (current liabilities)
2.3. Debt-to-Total-Investment Ratio (DTI)

Measure the magnitude of financing from external funds, within the total of
financing (composed of external and internal funds).
Formula

(Current Liabilities + Long-Term Liabilities) * 100 / Total Assets

(RE/IT) = ((PC + PLP) * 100) / AT
Analysis criterion:

The Total Asset is financed at X, X% with third-party resources.

(foreign), and therefore, is committed to that percentage.
2.4. Disaggregation of Debt over Investment

Measure the percentage relationship between each of the classes of liabilities.

both in the short and long term, with regard to the total asset.

Formula:

Short Term (ST):

(Current Liabilities / Total Assets) * 100 = DESIvCP = (CL/TA) * 100

Long Term (LT):

(Long-Term Liabilities / Total Assets) * 100 = DESIvLP = (LL/TA) * 100

2.5. Indebtedness over Equity

Show the relationship between the funds obtained from third parties (liabilities in
general) and equity funds.

Formula:

((Current Liabilities + Long-Term Liabilities) * 100) / Net Equity

(PLP) * 100) / PA

Analysis criterion:

For every 1 monetary unit contributed by the owners of assets, one obtains
from third parties an X, X% of additional financing.
2.6. Debt Quality Ratio (DQR)

Reason that qualifies the quality of the debt, in relation to the term for its cancellation.
The lower this ratio, the better the quality of the debt in terms of maturity,
since long-term debts will be settled, although this depends on the
sector in which the company subject to analysis is located.

Current Liabilities / (Current Liabilities + Long-Term Liabilities) = RCD = CL / (CL +

PLP

Optimal: As little as possible.

Example: RCD = 0.71. -For each monetary unit owed, 0.71 units.
monetary debts are short-term. Thus, 71% of the debt is short-term, and the rest is
long term.
 3. Profitability Indices

They measure the company's efficiency in using its assets, in relation to

efficiency in the management of its operations. The yields of the
investment, sales, the equity, etc.

3.1. Margen de Utilidad (MU)

It is the relationship between, 'the remainder in a profit and loss statement, after deducting from the
sales from exploitation, the associated costs (Operating Margin), the
administration and sales expenses (Operational Result), depreciation (Profit
Bruta), the tax and financial expenses plus other minority interests, which
It would correspond to the Net Utility, related to sales or operational income.
A high level of profit margin is desirable.
Formula:
MU = Net Profit / Sales
MU = UN / V
Analysis Criterion: For every monetary unit of sales, X, X are generated
monetary units of utility. A X, X% profit over sales.
3.2. Return on Assets (ROA)

Relate the net utility obtained in a period with the total assets.

Formula:

ROA =Utilidad Neta + carga financiera / Total de activos ROA = UN / A

Analysis Criterion:

For every monetary unit invested in assets, regardless of how they have been
financed, the company obtains net profits of X, X monetary units.
3.3. Rendimiento sobre el Capital (ROE, ROK o ROC)

Measures the performance of shareholders, in relation to the profit obtained in a

period.

Formula:

ROK = Net Profit / Capital ROK = NP / C

Analysis Criteria

For each monetary unit of capital contributed or invested by the owners, there
generate X, X monetary units of net profit.
3.4. Earnings Per Share (EPS)

They are measures used by a company when listed on the stock exchange.
trade of a country, especially corporations.

Formula:

EPS = Net Income / Shares Outstanding or Number of Shares EPS = NI /

NA

Analysis Criterion

For every share outstanding, there is X, X monetary units of profit.

3.5. Price/Earnings Ratio (P/E)

Formula:

RPU = Price per share / Earnings per share RPU = PxS / EPS

Analysis Criterion

The shares are sold at X, X times their earnings. The shareholder(s) is/are
willing to pay 'X' monetary units for each monetary benefit. For each
monetary unit of action is willing to pay 'X' monetary units.
 4. ACTIVITY INDICES

4.1. Cash Coverage (CEf)

Formula:

(UAI = Profit Before Tax), depreciation (D) is negative:

CEf =((U.A.I e intereses) + Depreciación) / Gastos Financieros CEf = (UAIEI + D) / GF

4.2. Inventory Turnover (IT)

Reason that relates the cost of sales to product inventory in

inventory or warehouse.
Formula:
RI = Cost of sales / Inventory RI = CS / I
Analysis criterion:
Optimal: As high as possible (to have inventory management as efficient as possible)
possible
It was sold in inventory X, XX times, as long as stocks last, by
consequently, sales may be lost.
4.3. Inventory Turnover Days (ITD)

Formula:

365 / Inventory turnover = DRI

They were collected in outstanding accounts receivable, lending money again X, XX

times during the year.

4.4. Days Sales Outstanding in Accounts Receivable (DSO)

Formula:

DRCxC = 365 days / Accounts Receivable Turnover DRCxC = 365 / AR Turnover

Analysis criterion
Credit sales were collected on average in XX days.
4.5. Accounts Payable Turnover (AP Turnover)

Relate the cost of goods sold (inventory) to the future accounts.

payments.

Formula:

RCxP =Costo mercadería vendida / Cuenta por PagarRCxP = CMV / CxP

Analysis Criterion
The outstanding accounts payable were settled, in a relationship of XX during the year.

4.6. Accounts Receivable Turnover (AR Turnover)

Relate the acquisition of assets arising from credit sales, with the
future income account.
Formula:
RCxC = Credit Sales / Accounts Receivable
RCxC = VC / CxC
4.7. Days Payable Outstanding (DPO)

Formula:

DRCxP = 365 days / Accounts Payable Turnover DRCxP = 365 / APC

Analysis Criterion:

The accounts payable were paid every XX days.

4.8. Total Asset Turnover (TAT)

Formula:
RTA = Ventas / Total Activos RTA =V / AT
Analysis Criterion:
For each monetary unit invested in the total assets, units are generated.
monetary in sales.
[Link] Assets Turnover (ROAf)

Formula:

ROAf =Ventas / Activos Fijos ROAf =V / Af

Analysis Criterion:

For each monetary unit invested in fixed assets, units are generated.
monetary in sales. For each monetary unit of sale, there is one unit
monetary in fixed assets.
 5. SOLVENCY RATIOS

5.1. Financial Expenses Ratio over Sales (FEROS)

Indicate the relationship between the financial expenses incurred in the activities.
of operation, management, etc., and the sales obtained in the period during which the
expenditure was committed.

Formula:

RGFSV =Total Gastos Financieros / Ventas Totales RGFSV = GF / VT

Analysis criterion:

If RGFSV > 0.5, it indicates that Financial Expenses are excessive. If 0.4 < RGFSV <
0.5 indicates an intermediate level of caution. If RGFSV < 0.4 ("Optimal"), the
Financial expenses are prudent in relation to sales.
.
5.2. Coverage of Financial Expenses (CFE)

Formula

(EBIT = Earnings Before Taxes) CGF = (EBIT and interest) / Expenses

financial
CGF = UAIEI / GF
Analysis criterion:

For every monetary unit that the company has in expenses, it must recover 'X'.
monetary units
Interpretation Considerations:

The correct interpretation of a ratio, in addition to the mentioned conditions

previously, you should consider:
The reasons must be interpreted in time series, according to sets of ratios.
A solitary index cannot identify the state of an organization.
There are no optimal 'a priori', since each reason is related to the activities of the
business, to planning, to objectives, and even to the evolution of the economy, due to
to what influences the actions of every company.
While a ratio provides a quantitative assessment, its interpretation requires a
qualitative abstraction of the analyst.
The analysis of financial ratios is a complement to other tools of analysis.
Financial, so it is ideal for being applied in isolation.