Basic Financial Ratio Analysis
Financial Ratio Analysis - Calculation and Explanation of the Ratios
Financial ratio analysis is an excellent tool to use for your business. You can compare your firm to other firms in the industry or you can compare one year of data to other years of data. It's all about comparison. This is an overview of how to calculate the ratios and what they mean.
How Do You Do Financial Statement Analysis?
In order to stay solvent and profitable, financial statement analysis is a necessary activity for a business firm to perform on a regular basis. Here are some of the best techniques to use for financial statement analysis.
Use Trend and Industry Analysis to Compare Your Financial Ratios
In order for financial ratios to mean anything, a firm has to have something to compare them to. Usually that means data from previous quarters or years of the firm's financial statements. It can also mean data from companies in the firm's industry.
Limitations of Financial Ratio Analysis
Even though financial ratio analysis is one of the most popular methods of financial analysis, it does have some limitations. Ratio analysis for a company should be benchmarked to ratios in the industry and window dressing should not be used.
What are the five categories of financial ratios and what does each measure?
There are five categories of financial ratios. Each measures a different financial aspect of the business firm.
Financial Ratio Analysis Tutorial 101
This financial ratio analysis tutorial gets you started learning how to analyze your business firm with 13 of the basic financial ratios.
What is liquidity and what are the liquidity ratios?
Liquidity, or short-term solvency, is an important metric for a firm to be able to measure. It measures the firm's ability to pay its short-term obligations on time.
What is the current ratio and how do you measure it?
A firm's liquidity ratios show its ability to meet its short term debt obligations. The current ratio is the broadest measure of liquidity.
What is the quick ratio and how is it used?
Liquidity analysis is important to a business as they need to know whether or not they can pay their short-term debt obligations. The quick ratio is a more specific measure of liquidity than the current ratio.
What is net working capital and how is it measured?
Net working capital is a financial formula that accompanies the current ratio in helping the firm determines its liquidity position.
What is the Cash Ratio, Cash Ratio Definition, and Cash Ratio Formula?
The cash ratio is the most stringent and conservative of all the financial ratio analysis liquidity ratios.
What does "burn rate" mean and how do you calculate it?
The burn rate is a measure of how long a company can keep operating until it has to seek more financing. It is calculated by the interval measure.
What are Solvency Ratios and What do They Measure?
Solvency ratios measure the ability of the firm to survive in the long run. Solvency ratio are a part of financial ratio analysis that deal with long-term debt servicing as opposed to the concept of liquidity that looks at the short-term.
What are the financial leverage ratios and what do they measure?
Financial leverage or debt ratios measure a business firm's ability to meet its long-debt debt obligations or those with a maturity of more than one year.
What is the debt to asset ratio, how is it calculated, and what does it measure
The debt to asset ratio measures the percentage of debt financing the firm has in relationship to the percentage of financing provided by investors.
What is the debt to equity ratio, how is it calculated and what does it measure?
An important debt or financial leverage ratio is the total debt to equity ratio. This ratio measures the amount of debt financing used by the firm as compared to investor financing.
What is the long-term debt to total capitalization ratio? How is it calculated?
The long-term debt to total capitalization ratio is one of the debt ratios in financial ratio analysis that measures the extent of the firm's financing with debt. It measures the extent to which long-term debt is used for the firm's permanent financing.
What is the times interest earned ratio and what does it measure?
The times interest earned ratio is a debt ratio that measures how well a business can cover its interest expense. It is one of the debt or financial leverage ratios that businesses need in order to monitor their debt position.
What is the fixed charge coverage ratio and how is it calculated?
The fixed charge coverage ratio is an important debt ratio in financial ratio analysis because it is a broader measure of the ability of a company to cover its fixed charges than the times interest earned ratio.
Use Asset Management Ratios in Financial Ratio Analysis
Asset management ratios are the key to analyzing how effectively and efficiency your small business is managing its assets. These ratios, also called turnover or efficiency ratios, indicate to the business owner how efficiently the asset base of the business is generating sales.
What are asset management ratios and how are they used?
Asset management or asset utilization ratios tell a small business how efficiently it is utilizing its assets to generate sales. Inventory, receivables, fixed assets, and total assets are analyzed.
What is the average collection period ratio and how is it calculated?
The average collection period of accounts receivable helps a business owner determine how liquid his accounts receivables are. Asset management or asset utilization ratios tell a small business how efficiently it is utilizing its assets to generate sales, in this case accounts receivable.
What is the accounts receivable turnover ratio and how is it calculated?
Asset management ratios include the accounts receivable turnover ratio as a part of financial ratio analysis. The accounts receivable turnover ratio, along with the average collection period, measures the efficiency of the firm's credit and collection policies.
What is the inventory turnover ratio and how is it calculated?
The inventory turnover ratio is one of the most important ratios in financial ratio analysis. It is a crucial asset management ratio as it measures the efficiency of the firm in managing and selling its inventory.
What is the fixed asset turnover ratio and how is it calculated?
The fixed asset turnover ratio measures the company's ability to generate sales from its investment in plant, property, and equipment.
What is the total asset turnover ratio and how is it calculated?
The total asset turnover ratio is an asset management ratio that measures how efficiently a company can use its assets to generate sales.
Use Profitability Ratios in Financial Ratio Analysis
Profitability ratios are the most important ratios in financial analysis to company investors. Net profit margin, return on assets, and return on equity are some of the most common profitability ratios.
Which Profitability Ratio do you use most Often and why?
There are a number of profitability ratios which measure various types of profitability. Which do you use most often and why?
What are profitability ratios?
What are profitability ratios? They are the ratios that show the firm's bottom line returns and margins.
Types of Profitability Ratio
Margin analysis and return analysis are the two types of profitability ratio analysis.
What is the Gross Profit Margin?
The gross profit margin is a profitability ratio that falls in the margin category. It shows average profit considering only sales and cost of goods sold.
What is the operating profit margin ratio?
The operating profit margin is a type of profitability ratio known as a margin ratio. The figures to calculate operating profit margin come from a company's income statement. The operating profit margin tells a business owner a lot about the cost control of the firm.
What is the net profit margin ratio?
The net profit margin ratio shows how many dollars of after-tax profit a company generates per dollar of sales.
What is the cash flow margin?
The cash flow margin is one of the most important profitability ratios. The cash flow margin ratio tells a company how well it converts sales to cash. It takes cash to pay expenses, so the conversion of sales dollars to cash is extremely important.
What is the Return on Assets ratio, also called the Return on Investm…
What is the return on assets ratio, also called the return on investment ratio?
What is the Return on Equity Ratio and how is it used?
The return on equity ratio is perhaps the ratio investors in a company look at most. This ratio lets the investor know how well the company is utilizing their investment in the firm.
How to Calculate the Dupont Model for ROI Analysis
Using the DuPont Model allows the business owner to break the firm's profitability. both ROI and ROE, down into component parts to see where profitability actually comes from and where any problems might exist.
Asset Turnover Ratios - What are Asset Turnover Ratios? - Types of Asset...
Asset turnover ratios, also called efficiency ratios, measure the efficiency with which a company's assets generate sales.
What are market value ratios and how are they used?
Market value ratios evaluate the economic status of your company in the wider marketplace. Market value ratios give management an idea of what the firm's investors think of the firm's performance and future prospects.
What is the Price Earnings Ratio, how is it Calculated, and how is it Used?
The price earnings ratio is a very important ratio for publicly traded businesses because it tells investors how much they are paying per share for each dollar of earnings. (net income) by the company.
What is the Definition of Earnings per Share, its Calculation, and Use?
In the simplest terms, earnings per share gives an investor the return on their investment in a share of stock of a publicly traded firm on a share price basis. Earnings per share is often known as "the bottom line" in investing terms.
What are Dividends Per Share and how are Dividends Per Share Calculated?
Dividend per share is important information for investors as they analyze what types of stocks in which they want to invest.
What is the Dividend Payout Ratio and How is it Calculated?
The dividend payout ratio is important for investors to know if they are trying to choose between investing between income-oriented or growth-oriented stocks in which to invest their money.
What is the Market to Book Financial Ratio and its Calculation and Use?
The market to book value ratio, also called the price to book ratio, allows investors to see how much a company is worth with regard to its book value.
What is the Book Value Per Share Financial Ratio?
Book value per share is a market value ratio that is used for accounting purposes by financial managers or owners of business firms.
What is the Market Price Per Share and How do you Calculate it?
The market price per share of stock is the current measure of the price of a share of stock based on information from a company's financial statements instead of historical data.
What is the Price/Cash Ratio?
The price/cash flow ratio is used by business firms as an investment valuation tool and as a way to know if the firm can meet its short-term debt obligations.
What is the Gearing Ratio, What Does it Mean, and How is it Calculated?
The gearing ratio in finance, also just called "gearing," is a measure of financial and business risk in a company. It compares the amount of debt financing and equity financing in a business firm.
What is Return on Invested Capital and How is it Calculated?
Return on invested capital is a performance and profitability ratio that is one of the most important valuation measures. Here is an explanation and calculation of the return on invested capital ratio.
Business Risk Ratios - How to Calculate Business Risk
All firms face business risk or the risk that sales will decline and income will decline along with sales. Here are some financial ratios that business owners can use to measure their business risk.
What is the Sustainable Growth for a Business?
The sustainable growth rate is the maximum amount a small business can growth without needing new financing. Here is an explanation of the sustainable growth rate and how to calculate it.