Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Profitability Ratios
- Profitability Ratios Formula
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio

## What are Financial Ratios?

Financial Ratios are key indicators of the financial performance of the company and are usually derived from its three statements including income statement, balance sheet, and cash flows. These financial ratios help in analyzing the company’s profitability, liquidity, assumed risks as well as financial stability.

### List of Top 28 Financial Ratios with Formulas & Types

Below are the types and list of financial ratios with Formulas

**Liquidity Financial Ratios Formulas**

**Turnover Financial Ratios Formulas**

- #5 – Inventory Turnover Ratio
- #6 – Receivables Turnover Ratio
- #7 – Capital Turnover Ratio
- #8 – Asset Turnover Ratio
- #9 – Net Working Capital Ratio
- #10 – Cash Conversion Cycle

**Operating Profitability Financial Ratio Formulas**

**Business Risk Ratios Formulas**

**Financial Risk Ratios Formulas**

**Stability Ratios**

**Coverage Financial Ratios Formulas**

**Control Ratios**

### Liquidity Financial Ratio Analysis

The first type of financial ratio analysis is the Liquidy Ratio. Liquidity ratio aim is to determine the ability of a business to meet its financial obligations during short-term and to maintain its short-term debt paying ability. Liquidity ratio can be calculated by multiple ways they are as follows:-

#### #1 – Current Ratio

Current ratio referred as a working capital ratio or banker’s ratio. Current ratio expresses the relationship of a current asset to current liabilities.

**Current Ratio Formula = Current Assets / Current Liability**

A company’s current ratio can be compared with past current ratio, this will help to determine if the current ratio is high or low at this period in time.

The ratio of 1 is considered to be ideal that is current assets are twice of a current liability then no issue will be in repaying liability and if the ratio is less than 2 repayment of liability will be difficult and work effects.

#### #2 – Acid Test Ratio/ Quick Ratio

The current ratio is generally used to evaluate an enterprise’s overall short-term solvency or liquidity position but many times it is desirable to know the more immediate position or instant debt paying ability of a firm than that indicated by the current ratio for this acid test financial ratio is used. It is relating the most liquid assets to current liabilities.

**Acid Test Formula = (Current Assets -Inventory)/(Current Liability)**

The quick ratio can be written as:-

**Quick Ratio Formula = Quick Assets / Current Liabilities**

Or

**Quick Ratio Formula = Quick Assets / Quick Liabilities**

#### #3 – Absolute Liquidity Ratio

Absolute Liquidity helps to calculate actual liquidity and for that inventory and receivables are excluded from current assets. For a better view of liquidity, some assets are excluded that may not represent current cash flow. Ideally, the ratio should be 1:2.

**Absolute Liquidity = Cash + Marketable Securities + Net Receivable and Debtors**

#### #4 – Cash Ratio

Cash ratio is useful for a company who is undergoing is financial trouble.

**Cash Ratio Formula = Cash + Marketable Securities / Current Liability**

If the ratio is high then it reflects underutilization of resources and if the ratio is low then it can lead to a problem in repayment of bills.

### Turnover Financial Ratio Analysis

The second type of financial ratio analysis is the Turnover Ratio. Turnover ratio is also known as activity ratio. This type of ratio indicates the efficiency with which an enterprise’s resources are utilized. For each asset type financial ratio can be calculated separately.

Following are financial ratios commonly calculated:-

#### #5 – Inventory Turnover Ratio

This financial ratio measures the relative size of inventory and influences the amount of cash available to pay liabilities.

**Inventory Turnover Ratio Formula = Cost of Goods Sold / Average Inventory**

#### #6 – Debtors or Receivable Turnover Ratio

The receivable turnover ratio shows how many times the receivable was turned into cash during the period.

**Receivable Turnover Ratio Formula = Net Credit Sales / Average Accounts Receivable**

#### #7 – Capital Turnover Ratio

The capital turnover ratio measures the effectiveness with which firm uses its financial resources.

**Capital Turnover Ratio Formula = Net Sales (Cost of Goods Sold) / Capital Employed**

#### #8 – Asset Turnover Ratio

This financial ratio reveals the number of times the net tangible assets are turned over during a year. Higher the ratio better it is.

**Asset Turnover Ratio Formula = Turnover / Net Tangible Assets**

#### #9 – Net Working Capital Turnover Ratio

This financial ratio indicates whether or not working capital has been effectively utilized in making sales. Net Working capital signifies the excess of current assets over current liabilities.

**Net Working Capital Turnover Ratio Formula = Net Sales / Net Working Capital**

#### #10 – Cash Conversion Cycle

Cash conversion cycle is the total time taken by the firm to convert its cash outflows into cash inflows (returns).

**Cash Conversion Cycle Formula = Receivable Days + Inventory Days – Payable Days**

### Operating Profitability Financial Ratio Analysis

The third type of financial ratio analysis is the Operating Profitability Ratio. Profitability ratio helps to measure the profitability of a company through this efficiency of business activity. Following are the important profitability ratios:-

#### #11 – Earning Margin

It is the ratio of net income to turnover express in percentage. It refers to the final net profit used.

**Earning Margin formula = Net Income / Turnover * 100**

#### #12 – Return on Capital Employed or Return On the Investment

This financial ratio measures profitability in relation to the total capital employed in a business enterprise.

**Return on Investment formula = Profit Before Interest and Tax / Total Capital Employed**

#### #13 – Return On Equity

Return on equity is derived by taking net income and dividing it by shareholder’s equity, it provides a return which management is realizing from the shareholder’s equity.

**Return on Equity Formula = Profit After Taxation – Preference Dividends / Ordinary Shareholder’s Fund * 100**

#### #14 – Earnings Per Share

EPS is derived by dividing the profit of the company by the total number of shares outstanding. It means profit or net earnings.

**Earnings Per Share Formula = Earnings After Taxation – Preference Dividends / Number of Ordinary Shares**

The investor uses all above ratio before investing and make maximum profit and analyze risk. Through ratio, it is easy for him to compare and predict the future growth of a company. It also simplifies financial statement.

### Business Risk Ratios

The fourth type of financial ratio analysis is the Business Risk Ratios. Here we measure how sensitive is the company’s earnings with respect to its fixed costs as well as the assumed debt on the balance sheet.

#### #15 – Operating Leverage

Operating leverage is the percentage change in operating profit relative to sales and it measures how sensitive the operating income is to the change in revenues. Greater use of fixed costs, greater the impact of a change in sales on the operating income of a company.

**Operating Leverage Formula = % change in EBIT / % change in Sales**

#### #16 – Financial Leverage

Financial leverage is the percentage change in Net profit relative to Operating Profit and it measures how sensitive the Net Income is to the change in Operating Income. Financial leverage primarily originates from company’s financing decisions (usage of debt).

**Financial Leverage formula = % change in Net Income / % change in EBIT**

#### #17 – Total Leverage

Total leverage is the percentage change in Net profit relative to its Sales. Total leverage measures how sensitive the Net Income is to the change in Sales.

**Total Leverage Formula = % change in Net Profit / % change in Sales**

### Financial Risk Ratio Analysis

The fifth type of financial ratio analysis is the Financial Risk Ratio. Here we measure how leveraged is the company and how it is placed with respect to its debt repayment capacity.

#### #18 – Debt Equity Ratio

**Debt Equity Formula = Long Term Debts / Shareholder’s Fund**

It helps to measures extent of equity to repay debt. It is used for long-term calculation.

#### #19 – Interest Coverage Ratio Analysis

This financial ratio signifies the ability of the firm to pay interest on the assumed debt.

**Interest Coverage Formula = EBITDA / Interest Expense**

- Higher interest coverage ratios imply greater ability of the firm to pay off its interests.
- If Interest coverage is less than 1, then EBITDA is not sufficient to pay off interest, which implies finding other ways to arrange funds.

#### #20 – Debt Service Coverage Ratio (DSCR)

Debt Service Coverage Ratio tells us whether the Operating Income is sufficient to pay off all obligations that are related to debt in a year.

**Debt Service Coverage Formula = Operating Income / Debt Service**

Operating Income is nothing but EBIT

Debt Service is Principal Payments + Interest Payments + Lease Payments

- A DSCR of less than 1.0 implies that the operating cash flows are not sufficient enough for Debt Servicing implying negative cash flows.

### Stability Ratios

The sixth type of financial ratio analysis is the Stability Ratio. Stability ratio is used with a vision of long-term. It uses to check whether the company is stable in the long run or not. This type of ratio analysis can be calculated by multiple ways they are as follows:-

#### #21 – Fixed Asset Ratio

This ratio is used to know whether the company is having sufficient fun or not to meet the long-term business requirement.

**Fixed Asset Ratio Formula = Fixed Assets / Capital Employed**

The ideal ratio is 0.67. If the ratio is less than 1 then it can be used to purchase fixed assets.

#### #22 – Ratio to Current Assets to Fixed Assets

**Ratio to Current Assets to Fixed Assets = Current Assets / Fixed Assets**

If ratio increases, profit increase and reflect business is expanding whereas if ratio decreases means trading is loose.

#### #23 – Proprietary Ratio

The proprietary ratio is the ratio of shareholder fund upon total tangible assets it tells about the financial strength of a company. Ideally, the ratio should be 1:3.

**Proprietary Ratio Formula = Shareholder Fund / Total Tangible Assets**

### Coverage Ratios

The seventh type of financial ratio analysis is the coverage Ratio. This type of ratio analysis is used to calculate dividend which needs to be paid to investors or interest to be paid to the lender. Higher the cover the better it is. It can be calculated by below ways:-

#### #24 – Fixed Interest Cover

It is used to measure business profitability and its ability to repay the loan.

**Fixed Interest Cover Formula = Net Profit Before Interest and Tax / Interest Charge**

#### #25 – Fixed Dividend Cover

It helps to measure dividend need to pay to the investor.

**Fixed Dividend Cover Formula = Net Profit Before Interest and Tax / Dividend on Preference Share**

### Control Financial Ratio Analysis

The eighth type of financial ratio analysis is the Control Ratio. Control ratio from the name itself it is clear that its use to control things by management. This type of ratio analysis helps management to check favorable or unfavorable performance.

#### #26 – Capacity Ratio

For this type of ratio analysis, the formula given below will be used for same.

**Capacity Ratio Formula = Actual Hour Worked / Budgeted Hour * 100**

#### #27 – Activity Ratio

To calculate a measure of activity below formula is used.

**Activity Ratio Formula = Standard Hours for Actual Production / Budgeted Standard Hour * 100**

#### #28 – Efficiency Ratio

To calculate productivity below formula is used.

**Efficiency Ratio Formula = Standard Hours for Actual Production / Actual Hour Worked * 100**

If a percentage is 100 or more it is considered to be as favorable, if a percentage is less than 100% then it is unfavorable.

### Recommended Articles

This has been a guide to Financial Ratio Analysis. Here we provide a comprehensive list of 28 financial ratios formulas, types, and its interpretation. You may learn more about ratio analysis from the following articles –

- Interpretation of Equity Ratio Calculation
- Average Inventory Formula
- Operating Expense Example
- Cost of Goods Sold Formula
- What are Changes in Net Working Capital?
- Cash Ratio Formula
- Calculate Operating Expense Ratio
- Calculate Equity Turnover
- Calculate Inventory Turnover Ratio Formula
- Limitations of Ratio Analysis

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