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Financial Analysis Fundamentals
and Ratios
Financial Analysis Fundamentals
Vertical and Horizontal Income Statement Analysis
Gross Profit Margin : This ratio shows how much is spent on producing the good or service that is sold for every dollar of sales revenue. It is a profitability ratio calculated as: Gross Profit Margin = Gross Profit / Sales
Operating Profit Margin : This ratio compares the operating income of a company to its net sales. It is a profitability ratio calculated as: Operating Profit Margin = EBIT / Sales
Net Profit Margin : This ratio shows how much is earned for every dollar of sales revenue. It is a profitability ratio calculated as: Net Profit Margin = Net Income / Sales
Tax Ratio : This ratio shows how well management manages tax. It is an efficiency ratio calculated as: Tax Ratio = Tax Expense / Pre-tax Income
Interest Coverage Ratio : This ratio shows how much income is available to service debt costs. It is a leverage ratio calculated as: Interest Coverage Ratio = EBIT(DA) / Interest Expenses
Balance Sheet Analysis and Ratios
Current Ratio : This ratio measures the ability of a company to cover its obligations in the short term. It is a liquidity ratio calculated as: Current Ratio = Current Assets / Current Liabilities
Quick Ratio / Acid Test Ratio : This ratio provides a more prudent measure of short-term liquidity, recognizing that the inventory cannot always be readily converted into cash. It is a liquidity ratio calculated as: Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Asset Turnover Ratio : This ratio shows how effective the company is in generating sales from its assets. It is calculated as: Asset Turnover Ratio = Sales / Total (or Net) Assets
Inventory Turnover Ratio : This ratio shows how quickly a company sells its inventory. It is calculated as: Inventory Turnover Ratio = Cost of Sales / Inventory
Inventory Days Ratio : This ratio indicates the average number of days goods remain in inventory before being sold. It is calculated as: Inventory Days Ratio = (Inventory x 365) / Cost of Sales
Accounts Receivable Turnover Ratio : This ratio measures how effective the company's credit policies are. It is an efficiency ratio calculated as: Accounts Receivable Turnover Ratio = Sales / Accounts Receivable
Accounts Receivable Days Ratio : This ratio indicates the average number of days a firm takes to collect payments on goods sold. It is an efficiency ratio calculated as: Accounts Receivable Days Ratio = (Accounts Receivable x 365) / Sales
Accounts Payable Turnover Ratio : This ratio measures how effective the company is in paying its suppliers. It is an efficiency ratio calculated as: Accounts Payable Turnover Ratio = Cost of Sales / Accounts Payable
Accounts Payable Days Ratio : This ratio indicates the average number of days a firm takes to pay for items purchased. It is an efficiency ratio calculated as: Accounts Payable Days Ratio = (Accounts Payable x 365) / Cost of Sales
PP&E Turnover Ratio : This ratio measures the sales a company is able to generate from its capital assets. It is calculated as: PP&E Turnover Ratio = Sales / PP&E
Cash Flow Statement Analysis and Ratios
Debt to Equity Ratio : This ratio calculates the weight of total debt and financial liabilities against shareholder's equity. It is calculated as: Debt to Equity = Interest Bearing Liabilities / Total Shareholder's Equity
Debt to Tangible Net Worth Ratio : This ratio measures how many physical assets a company has. It is calculated as: Debt to Tangible Net Worth = Interest Bearing Liabilities / (Equity - Intangible Assets)
Total Liabilities to Equity Ratio : This ratio is used in conjunction with the debt to equity ratio to determine the impact operational liabilities have on the funding of the business. It is a leverage ratio calculated as: Total Liabilities to Equity = Total Liabilities / Equity
Total Assets to Equity Ratio : This ratio shows the relationship of total assets to the portion owned by shareholders. It is used to measure the leverage relative to assets. It is a leverage ratio calculated as: Total Assets to Equity = Total Assets / Equity
Debt to EBITDA Ratio : This ratio measures the amount of leverage relative to EBITDA. It reflects the cash available to pay back the debt. It is calculated as: Debt to EBITDA = Interest Bearing Liabilities / EBITDA
