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ratio analysis

Ratio analysis—the foundation of fundamental analysis—helps to gain a deeper insight into the financial health and the current and probable performance of the company being studied. For this insight, the analysts use the quantitative method where the information recorded in the company’s financial statements are compared and analyzed. And there are certain formulae that are used for the same.

In this blog, we shall discuss various Ratio Analysis, the various Ratios Formulae, and their importance. We would look into the classification of ratios, where we have explained the importance of using various ratios and the formulae to know how they are calculated. To help you learn better and for the easy revisions later, you are provided here with the formulae for the ratios that we have discussed in this series. Let’s move on and look into Ratio Analysis – Ratios Formulae.



ratio analysis

Liquidity Ratios

Also known as Solvency Ratios, and as the name indicates, it focuses on a company’s current assets and liabilities to assess if it can pay the short-term debts. The three common liquidity ratios used are current ratio, quick ratio, and burn rate. Among the three, current ratio comes in handy to analyze the liquidity and solvency of the start-ups.

1Current RatioCurrent Assets/Current Liabilities
2Quick RatioLiquid Assets/Current Liabilities
3Absolute Liquid RatioAbsolute Liquid Assets/Current Liabilities

Profitability Ratios

These ratios analyze another key aspect of a company and that is how it uses its assets and how effectively it generates the profit from the assets and equities. This also then gives the analyst information on the effectiveness of the use of the company’s operations.

1Gross Profit RatioGross Profit/Net Sales X 100
2Operating Cost RatioOperating Cost/Net Sales X 100
3Operating Profit RatioOperating Profit/Net Sales X 100
4Net Profit RatioNet Profit/Net Sales X 100
5Return on Investment RatioNet Profit After Interest  And Taxes/ Shareholders Funds or Investments  X 100
6Return on Capital Employed RatioNet Profit after Taxes/ Gross Capital Employed X 100
7Earnings Per Share RatioNet Profit After Tax & Preference Dividend /No of Equity Shares
8Dividend Pay Out RatioDividend Per Equity Share/Earning Per Equity Share X 100
9Earning Per Equity ShareNet Profit after Tax & Preference Dividend / No. of Equity Share
10Dividend Yield RatioDividend Per Share/ Market Value Per Share X 100
11Price Earnings RatioMarket Price Per Share Equity Share/ Earning Per Share X 100
12Net Profit to Net Worth RatioNet Profit after Taxes / Shareholders Net Worth X 100

Working Capital Ratios

Like the Liquidity ratios, it also analyses if the company can pay off the current debts or liabilities using the current assets. This ratio is crucial for the creditors to establish the liquidity of a company, and how quickly a company converts its assets to bring in cash for resolving the debts.

1Inventory RatioNet Sales / Inventory
2Debtors Turnover RatioTotal Sales /  Account Receivables
3Debt Collection RatioReceivables  x Months or days in a year / Net Credit Sales for the year
4Creditors Turnover RatioNet Credit Purchases / Average Accounts Payable
5Average Payment PeriodAverage Trade Creditors / Net Credit Purchases X 100
6Working Capital Turnover RatioNet Sales / Working Capital
7Fixed Assets Turnover RatioCost of goods Sold / Total Fixed Assets
8Capital Turnover RatioCost of Sales / Capital Employed

Capital Structure Ratios

Each firm or company has capital or funds to finance its operations. These ratios, i.e., the Capital Structure Ratios, analyze how structurally a firm uses the capital or funds.

1Debt Equity RatioTotal Long Term Debts / Shareholders Fund
2Proprietary RatioShareholders Fund/ Total Assets
3Capital Gearing ratioEquity Share Capital / Fixed Interest Bearing Funds
4Debt Service RatioNet profit Before Interest & Taxes / Fixed Interest Charges

Overall Profitability Ratio

True to its name, these ratios measure how profitable a particular firm or company is, or how it can turn its assets and capital into profits for future use.

1Overall Profit Ability RatioNet Profit / Total Assets

Hope the knowledge that we shared on the Ratio Analysis – Ratios Formulae topic helped you understand these!

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