Table: Summary Of Financial Accounting Ratio Analysis

July 24th, 2007 Comments off
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SUMMARY OF FINANCIAL ACCOUNTING RATIO

PROFITABILITY RATIO:

Financial Ratio Formula Measurements
Return on Total Assets Operating profit before income tax + interest expense/ Average total assets Measures rate of return earned through operating total assets provided by both creditors and owners
Return on ordinary shareholders’ equity Operating profit & extraordinary items after income tax minus Preference dividends /  Average ordinary shareholders’ equity Measures rate of return earned on assets provided by owners
Gross Profit Margin Gross Profit / Net Sales Profitability of trading and mark-up
Profit Margin Operating profit after income tax / Net Sales Revenue Measures net profitability of each dollar of sales

MARKET BASED FINANCIAL RATIO:

Financial Ratio Formula Measurements
Earnings per share Operating profits after income tax less Preference dividends / Weighted average number of ordinary shares issued Measures profit earned on each ordinary share
Price-earnings ratio Market price per ordinary share / Earnings per ordinary share Measures the amount investors are paying for a dollar of earnings
Earning Yield Earnings per ordinary share / Market price per ordinary share Measures the return to an investor purchasing shares at the current market price.
Dividend Yield Annual dividend per ordinary share / Market price per ordinary share Measures the rate of return to shareholders based on current market price.
Dividend Payout Total dividend per ordinary share / Market price per ordinary share Measures the percentage of profits paid out to ordinary shareholders
Net Asset Backing (NTA) Ordinary shareholders’ equity / No of ordinary shares Measure the assets backing per share

LIQUIDITY RATIO:

Financial Ratio Formula Measurements
Current Ratio Current Assets / Current liabilities A measure of short-term liquidity. Indicates the ability of entity to meet its short-term debts from its current assets
Quick Ratio Current Assets less inventory / Current liabilities A more rigorous measure of short-term liquidity. Indicates the ability of the entity to meet unexpected demands from liquid current asses

  ASSET MANAGEMENT/UTILISATION/ACTIVITY RATIOS:

Financial Ratio Formula Measurements
Receivables turnover Net sales revenue / Average receivables balance Measures the effectiveness of collections; used to evaluate whether receivables balance is excessive
Average collection period Average receivables balance x 365  / Net sales revenue Measures the average number of days taken by an entity to collect its receivables
Inventory turnover Cost of goods sold / Average inventory balance Indicates the liquidity of inventory. Measures the number of times inventory was sold on the average during the period
Total Asset turnover ratio Net sales revenue / Average total assets Measures the effectiveness of an entity in using its assets during the period.
Turnover of Fixed Assets Net Sales / Fixed Assets Measure the efficiency of the usage of fixed assets in generating sales

   GEARING/FINANCIAL STABILITY RATIO:

Financial Ratio Formula Measurements
Debt ratio Total Liabilities / Total assets Measures percentage of assets provided by creditors and extent of using gearing
Equity ratio or Proprietary ratio Total shareholders’ equity / Total assets Measures percentage of assets provided by shareholders and the extent of using gearing
Capitalization ratio Total assets / Total shareholders’ equity The reciprocal of the equity ratio and thus measures the same thing
Times interest earned Operating profit before income tax + Interest expense / Interest expense + Interest capitalized Measures the ability of the entity to meet its interest payments out of current profits.

   CASH SUFFICIENCY RATIO:

  Financial Ratio Formula Measurements
Cash flow adequacy Cash from operations / Long-term debt paid + Assets acquired + Dividends paid Measures the entity’s ability to cover its main cash requirements
Long-term debt repayment Long-term debt repayments / Cash from operations Measures the entity’s ability to cover its long-term debt out of cash from operations
Dividend payment Dividends paid / Cash from operations Measures the entity’s ability to cover its dividend payment
Reinvestment Non-current asset payments / Cash from operations Measures the entity’s ability to pay for its non-current assets out of cash from operations
Debt coverage Total long-term debt / Cash from operations Measures the payback period for coverage of long-term debt.

  CASH FLOW EFFICIENCY RATIO:

  Financial Ratio Formula Measurements
Cash flow to sales Cash from operations / Net sales revenue Measures ability to convert sales revenue into cash flows
Operation index Cash from operations / Operating profit after income tax An index measuring the relationship between profit from operations and operating cash flows
Cash flow return on assets Cash from operation + Tax paid + Interest paid / Average total assets Measures the operating cash flow return on assets before interest and tax

 FORECAST BANKRUPTCY RATIO:

Refer to Altman Z’s Financial Ratio

Each financial ratio is linked to the respective topic in this blog to  provide more details for the readers. 

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Financial Accounting

 
 

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