Formulae of Financial Statement Analysis
The amount that can be withdrawn without affecting the business is called free cash flow.
* Classification of Ratio Analysis:
i) Liquidity Ratio
ii) Assest Management Ratio
iii) Debt Management Ratio
iv) Profitability Ratio
v) Market Value Ratio
i) Liquidity Ratio :
a) Current Ratio = Current Assets
Current Liabilities
= ...........: 1
(Standard Measurement of Current Ratio is 2 : 1. If less than 2:1, the financial position of the organization is considered weak. If more than 2:1, it is considered as unnecessary investment in current
assets. )
Where,
Current Assests: Cash, Account Receivable, Bills Receivable, Prepaid expenses, Marketable Securities, Inventory Management, Debtors, Short term investment
Current Liabilities: Account payable, Bills payable, Notes payable, Short term, Bank loan, Overdraft, Creditors
b) Quick Ratio= Quick Assests
Current liabilities
Where,
Quick Assets: Current Assets- Prepaid expenses- Closing stock
(Quick Ratio can be converted into cash within one year without changing the price. It is also known as liquid and acid test ratio. It's standard measurement is 1:1.)
c) Cash Ratio= Cash and Marketable securities
Current liabilities
= .............. times
ii) Assets Management Ratio:
* When cost of goods sold and average inventory are available
a) Inventory turnover ratio: Cost of goods sold
Average Inventory
= .......... times
Where,
Cost of goods sold : Net Sales- Gross Profit
Average Inventory: Opening stock+ Closing stock
2
* When cost of goods sold and average inventory arenot available
or,
Inventory turnover ratio= Sales
Inventory
= .......... times
[ If the inventory turnover ratio is high then goods are considered to be sold fast. If the inventory turnover ratio is low then goods are considered to be sold slowly. ]
b) Debtors turnover ratio = Net Sales
Debtors/ Account Receivable
= .............. times
c) Days Sales Outstanding /
Average Collection period = Days in a year
Debtors turnover ratio
or,
Average Collection period = Days in a year * Acc Receivable
Sales
= .............. days
[ High Ratio is not good because it indicates that the customers are paying slowly and there is possibility of bad debt loss.
Low Ratio is good because it indicates that the customers are paying promptly and there is no possibility of bad debt.]
d) Fixed assets turnover ratio = Sales
Fixed assets
e) Total assets turnover ratio = Sales
Total assets
[ High ratio is good because it indicates that the assets are utilized properly and generating adequate sale. Low ratio is not good because it indicates that the assets arenot utilized properly and generating adequate sale.]
iii) Debt Management Ratio :
a) Debt assets ratio( DA) = Total debt
Total assets
Where,
Total debt : Current Liability+ Long term debt
Total assets: Total debt+ Total equity
b) Debt equity ratio(DE) = Total debt
Total equity
=.............. times
( In the case where the debt assets ratio is given)
Debt equity ratio ( DE) = DA
1 - DE
( In the case where the debt equity ratio is given, we find out debt assests ratio )
Debt assets ratio= DE
1+ DE
c) Equity Multiplier ( EM) = Total Assets
Common equity
= .......... times
or, EM= 1
1+DA
EM= 1+ DE ratio
d) Liabilities to assets ratio= Total liabilities
Total assets
Where,
Total Liabilities = Current Liabilities+ Long term debt
e) Time Interest Earned Ratio(TE Ratio)= EBIT
Int. expenses
Where,
EBIT = Earning before interest and tax
( Operating profit is also known as EBIT )
f) Cash Coverage Ratio= EBIT+ Depreciation
Interest expenses
= ......... times
g) EBITDA Coverage ratio
= EBITDA+ Lease payment
( Int+ Lease payment+ Principal payment)
= ........ times
iv) Profitability Ratio :
a) Gross profit margin/ratio= Gross profit * 100
Sales
= ........ %
Where,
Gross profit: Sales- Cost of goods sold
b) Net profit margin/ ratio= Net profit * 100
Sales
= .........%
(Net profit is also known as NPAT )
c) Operating margin/ ratio= Operating profit * 100
Sales
(Operating profit is also known as EBIT)
d) Basic earning power ratio= EBIT * 100
Total assets
= .......... %
e) Return on assets (ROA) = Net profit / income * 100
Total Assets
= ......... %
f) Return on Equity ( ROE) = Net profit * 100
Total equity
= ......... %
V) Market Value Ratio :
a) Earning per share (EPS) = NPAT- Prefered dividend
No.of.equity share outstanding
= Rs............
b) Price Earning Ratio(P/E Ratio) = Market price per share
Earning per share
= .............. times
c) Market to book value ratio =Market price per share
Book Value per share
= ....... times
* Calculationof ROA and ROE using Dupont System
i) Return on Assets (ROA) = Net profit margin x Total assets turnover ratio
= Net profit x Sales
Sales Total assets
= Net profit
Total assets
ii) Return on equity (ROE) = ROA x equity multiplier
= Net profit margin x Total assets turnover ratio x equity multiplier
= Net profit x Total Assets
Total assets Total equity
= Net profit
Total equity
Comments
Post a Comment