Financial Ratios – Profitability Ratios

Profitability ratios can be classified into two categories. 

1.    Profit margin ratios
2.    Rate of return ratios

Profit margin ratios show the relation between the profit and the sales whereas the rate of return ratios show the relation between profit and the investment.

Profit margin Ratios

Profit margin is referred to the relation between the earnings of a company and its sales. If a company has higher profit margin that company is more efficient. Usually in less competitive market (sector) the companies enjoy high profit margins.

Gross profit margin      = Gross profit / Sales

Gross profit is the difference between net sales and cost of goods sold. This ratio shows the margin left after covering manufacturing cost.  This profit is before overhead, payroll, interest and tax. Read more

May 31, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

Financial Ratios - Turnover Ratios

Turnover ratios are also referred to as Activity Ratios  or Asset Management Ratios .

They show the relationship between levels of different assets. They tell us how efficiently assets are deployed by the firm.

Key Turnover ratios are

Inventory Turnover Ratio = Net Sales/ Inventory

The numerator of this ratio is net sales for the year and the Denominator is the inventory balance at the end of the year. This ratio reflects the efficiency of inventory management. The inventory should be inline with sales; not too high not too low. Read more

May 31, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

Financial Ratios - Leverage Ratios

Financial leverage refers to the use of the debt capital. Share holders are interested to know the leverage position of a company. Debt is cheaper but considered riskier compared to equity. Leverage ratios help in assessing the risk arising from the debt.

Leverage ratios can be classified into two categories.

1.    Structural ratios
2.    Coverage ratios

Structural ratios tell us the portion of debt and equity in the structure of the company. Coverage ratios tell us the debt servicing commitments and the sourcing the funds to meet them.

The following two ratios fall under Structural ratios. Read more

May 30, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

What are Financial Ratios – Ratio Analysis

Financial ratios are mathematical ratios of the information derived from balance sheet and income statement which give the relationship between different financial data.

Ratio analysis is the analysis of the financial ratios. It’s useful in comparing a firm’s healthiness and profitability with other firms and also to compare the same company’s figures with its historical data. It helps in identifying current trends of the company so that future can be planned. It helps in identifying gaps between the business expectations and actual performance.

Financial ratios can be divided into the following categories depending on the type of information they provide. Read more

May 30, 2009 | Filed Under Fundamental Analysis | 1 Comment 

Current Ratio and Quick Ratio/ Acid Test Ratio

Liquidity refers to the ability of a firm to meet its short term obligations, usually 1 year. 

The following two ratios are considered as Liquidity ratios

Current Ratio
Acid Test Ratio

Current Ratio = Current Assets / Current liabilities

Acid Test Ratio = Quick Assets / Current Liabilities

Acid Test ratio is also known as Quick ratio since it considers only the quick assets which are more liquid. Inventory is not considered as part of quick assets since it’s can’t be converted quickly into cash. Read more

May 14, 2009 | Filed Under Fundamental Analysis | Leave a Comment 

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