Financial Accounts

The Financial Ratios are ratios used to measure the performance and the overall financial condition of a company.

There are several financial ratios. The financial ratios are divided into: Liquidity Ratios Profitability Ratios Debt Ratios Operating Performance Ratios Investment Valuation Ratios

Financial Ratios

Liquidity Ratios: Measure the company’s ability to pay off its short term debts (liabilities) Current Ratio = Current Assets / Current

Liabilities The result indicates the number of times that the

company, using its current assets, can pay its current liabilities. Current Ratio = This means that the company can pay its current

liabilities, using its current assets XXXX times. Is that a good thing or a bad thing?

Financial Ratios

Liquidity Ratios Quick Ratio (Acid-Test) =

(Current Assets – Inventories)/(Current Liabilities)

The result indicates the number of times that the company, using its liquid assets, can pay its current liabilities.

Quick Ratio = Cash Ratio = Cash and Equivalents / Current Liabilities Cash Ratio = The result indicates the number of times that the company,

using cash, can pay its current liabilities.

Financial Ratios

Profitability Ratios: Measures the performance of the company and how well the company is using its resources. Return on Assets (ROA) = Net Income / Average Total

Assets ROA =

This means that each dollar in assets produce XXXX dollars or XXXX Return on Equity (ROE) = Net Income / Average

Shareholders’ Equity ROE = This means that each dollar invested produce XXXX dollars or XXXX

Financial Ratios

Profitability Ratios: Measures the performance of the company and how well the company is using its resources. Gross Profit Margin = (Gross Profit / Sales

Revenue)*100 GPM = This indicates what the return is after we take variable costs

like production wages and materials from our sales revenue. Net Profit Margin = (Net Profit / Sales Revenue)*100

NPM = This indicates what the return is after we take all the costs,

variables and fixed.

Financial Ratios

Profitability Ratios: Measures the performance of the company and how well the company is using its resources. Return on Capital Employed = (Net Profit

Before Tax/ Total Capital Employed)*100 ROCE= This is often referred to as the primary ratio. It

informs stakeholders about how effective the business is at returning a profit from the capital it has.

Financial Ratios

Operating Ratios: Measures the overall operational performance of a company. Fixed-Asset (PPE) Turnover = Revenue /

Fixed Assets (PPE) Fixed-Asset (PPE) Turnover = This indicates that each dollar invested in fixed

assets (Property, Plant, and Equipment) produces XXXX dollars of revenue (sales).

The higher the ratio, the more efficient the company is.

Financial Ratios

Operating Ratios: Measures the overall operational performance of a company. Debtor Days = (trade debtors / sales

revenue) * 365 = days Debtor Days= This indicates how long it takes on average for

customers to pay a business.

Financial Ratios

Operating Ratios: Measures the overall operational performance of a company. Creditor Days = (accounts payable / total

revenue) * 365 = days Creditor Days= This measures how quickly a business pays its

suppliers during the year.

Financial Ratios

Operating Ratios: Measures the overall operational performance of a company. Stock Turnover Ratios= (average

inventories/ cost of sales)*365 = days Debtor Days= This indicates how many days it takes to sell

stock.

Financial Ratios

Debt Ratios: The debt ratios provide information about their overall debt and the mix between debt and equity. Shows the users how the company is funding. Debt Ratio = Total Liabilities / Total Assets

Debt Ratio = This indicates the amount of leverage used by a

company. The lower the percentage, the less the company is dependent on leverage.

Financial Ratios

Debt Ratios Debt-Equity Ratio = Total Liabilities /

Shareholders’ This ratio compares total liabilities to

stockholders’ equity. The lower the percentage, the less the company is dependent on leverage.

Financial Ratios

Investor Ratios These financial ratios give important information

to investor about the earnings per share of the company and the dividends.

Gearing = (long term loan capital / total capital employed) * 100 =

Gearing looks at the proportion of capital employed that comes from long-term loans, as opposed to coming from equity and retained profits.

Financial Ratios

Investor Ratios Earnings per share = Profit after tax/

number of ordinary shares This measures the amount that each share is

earning for the shareholder or prospective shareholder.

Dividend Yield =(dividends per share/market price per share)*100

This indicates the return to shareholders against the market price of the share.

Financial Ratios