Learn Some Basic Key Financial Ratios

The analysis of financial ratios enables investors to assess a company’s past and present financial condition and operation results.

1) Liquidity ratios

·        The ability to meet its financial obligation which fall due in the next 12 months

i) Current ratio = Current Asset / Current Liabilities

ii) Quick ratio = Current Asset – Inventory / Current Liabilities

iii) Net working capital = Current Asset – Current Liabilities

2) Activity ratios

·        Evaluate how effectively the company is making use of assets.

i) Average Collection Period = (Acc Receivable / Total Credit Sales) X 365 days

ii) Inventory Turnover Ratio = Cost Of Sale / Average Inventory

iii) Total Asset Turnover = Annual Sale / Total Asset

3) Leverage ratios

·        Usage of external funds and impact of such financing on financial position of a company

i) Debt-Equity ratio = Loan + Deferred Liabilities / Shareholders Fund

ii) Interest Coverage = Times Interest Earned Ratio / Total Interest Expense

4) Profitability ratio

·        Amount of resources utilized to bring in absolute profit figures

i) Return On Equity = Net Profit After Tax / Shareholders’ Fund

ii) Return On Asset = Net Profit After Tax / Total Asset

iii) Net Profit Margin = Net Profit / Total Sales

5) Share Market ratios

·        Ratios used to assess the performance of a company for stock valuation purposes.

i) Earning Per Share (EPS) = Net Profit After Tax / Preference Share Dividend / Number Ord.Shares Outstanding

ii) Price Earning ratio (P/E) = Market Price Of Share / EPS

iii) Dividend Yield = Annual Div Per Share / Current Market Price

iv) Dividend Payout Ratio = Div Per Share / EPS

v) Book Value Per Share = Shareholders’ Equity / No. Ord.  Shares Outstanding