RATIO
ANALYSIS
Expresses the relationship
among selected items of
financial statement data.
([Link]. 2013)
Learning Objectives:
At the end of the chapter, the students is
expected to:
[Link] measurement levels, namely;
profitability, efficiency, solvency and
liquidity. (ABM_FABM12-Ih-h-12).
2.C0mpute and interpret financial ratios.
PROFITABILITY
RATIOS- measures the
ability of the company to
generate income from
the use of its assets and
invested capital as well
1. GROSS PROFIT RATIO
-reports the peso value of the gross profit
earned for every peso of sales. We can infer the
average pricing policy from the gross profit
margin.
Formula : Gross Profit
Net Sales
2. OPERATING INCOME
RATIO
-expresses operating income as a percentage of sales. It measures
the percentage of profit earned from each peso of sales in the
company’s core business operations(Horngren [Link].2013). A company
with high operating income ratio may imply a lean operation and have
low operating expenses. Maximizing operating income depends on
keeping operating costs as low as possible (Horngren [Link].2013).
Formula : Operating Income
Net Sales
3. NET PROFIT RATIO
-relates the peso value of the net income
earned to every peso of sales. This shows how
much profit will go to the owner for every peso of
sales made.
Formula : Net Income
Net Sales
4. RETURN ON ASSET (ROA)
-measures the peso value of income generated
by employing the company’s assets. It is viewed as
an interest rate or a form of yield on asset
investment.
Formula : Net Income
Average Assets
4. RETURN ON ASSET (ROA)
-The numerator of ROA is net income.
However, net income is profit for the shareholders.
On the other hand, asset is allocated to both
creditors and shareholders.
Formula : Net Income
Average Assets
5. RETURN ON EQUITY
(ROE)
-measures the return (net income) generated
by the owner’s capital invested in the business.
Similar to ROA, the denominator of ROE may also
be total equity or average equity.
Formula : Net Income
Average Equity
OPERATIONAL EFFICIENCY
RATIO
It measures the ability of the company to
utilize its assets. Operational Efficiency is
measured based on the company’s ability to
generate sales from the utilization of its
assets, as a whole or individually. The Turn
over ratios are primarily used to measure
operational efficiency.
OPERATIONAL EFFICIENCY
RATIO
1. ASSET TURNOVER- measures the peso
value of sales generated for every
peso of the company’s assets. The
higher the turnover rate, the more
efficient the company is in using its
assets
OPERATIONAL EFFICIENCY
RATIO
1. ASSET TURNOVER
Formula: Net Sales
Average Asset
OPERATIONAL EFFICIENCY
RATIO
2. FIXED ASSET TURNOVER- is
indicator of the efficiency of fixed assets
in generating sales.
Formula: Net Sales
Average Fixed Asset
OPERATIONAL EFFICIENCY
RATIO
3. INVENTORY TURNOVER is measures based
on the cost of goods sold and not sales. As such
both the numerator and denominator of this ratio
are measured at cost. It is an indicator of how
fast the company can sell inventory.
Formula: Cost of Goods Sold
Average Inventory
OPERATIONAL EFFICIENCY
RATIO
4. DAYS IN INVENTORY
An alternative to Inventory Turnover is
“DAYS IN INVENTORY”- this measures the
number of days from the acquisition to sale
Formula: 365_________
Inventory Turnover
OPERATIONAL EFFICIENCY
RATIO
5. ACCOUNTS RECEIVABLE TURNOVER
-measures the number of times the company
was able to collect on its average accounts
receivable during the year.
Formula: Net Sales________
Average Accounts Receivable
OPERATIONAL EFFICIENCY
RATIO
6. DAYS IN ACCOUNTS RECEIVABLE
-measures the company’s collection period
which number of days from sale to
collection.
Formula: 365_______
Account Receivable
SOLVENCY RATIO
Refers to the company’s capacity to pay their long
term liabilities.
1. DEBT RATIO – indicates the percentage of the
company’s assets that are financed by debt. A high
debt to asset ratio implies a high level of debt.
Formula: TOTAL DEBT______
TOTAL ASSETS
SOLVENCY RATIO
2. EQUITY RATIO- indicates the percentage of
the company’s assets that are finance by capital.
A high equity to asset ratio implies a high level of
capital.
Formula: TOTAL EQUITY______
TOTAL ASSETS
SOLVENCY RATIO
3. DEBT TO EQUITY RATIO- indicates the
company’s reliance to debt or liability as source
of financing relative to equity. A high ratio
suggests a high level of debt that may result in
high interest expense.
Formula: TOTAL DEBT_____
EQUITY
SOLVENCY RATIO
4. INTEREST COVERAGE RATIO- measures the
company’s ability to cover the interest expense on
its liability with its operating income. Creditors
prefer a high coverage ratio to give them
protection that interest due to them can be paid.
Formula: OPERATING INCOME___
INTEREST EXPENSE
LIQUIDITY RATIO
- Intends to measure the company’s ability to pay debts
that are coming due. (short term debt)
- 1. CURRENT RATIO – is used to evaluate the company’s
liquidity. It seeks to measure whether there are sufficient
current assets to pay current liabilities.
- Creditors normally prefer a current ratio of 2.
Formula: CURRENT ASSETS___
CURRENT LIABILITIES
LIQUIDITY RATIO
- Intends to measure the company’s ability to pay debts
that are coming due. (short term debt)
- 2. QUICK RATIO – is a stricter measure of liquidity. It
does not consider all the current assets, only those
that are easier to liquidate such as CASH AND A/R
that are referred to as QUICK ASSETS.
- Formula: QUICK ASSETS___
CURRENT LIABILITIES
LIQUIDITY RATIO
- Intends to measure the company’s ability to pay debts
that are coming due. (short term debt)
- 2. QUICK RATIO – is a stricter measure of liquidity. It
does not consider all the current assets, only those
that are easier to liquidate such as CASH AND A/R
that are referred to as QUICK ASSETS.
- Formula: QUICK ASSETS___
CURRENT LIABILITIES