Show Ratio Analysis Formula (Table of Contents) What is the Ratio Analysis Formula?The term “Ratio Analysis” refers to the analytical technique wherein a plethora of financial ratios is computed based on the financial information either available in the annual reports or public domain. The ratio analysis helps in assessing the subject company’s financial and operational position. The financial ratios used in ratio analysis technique are broadly categorized into the following four major categories:
ExplanationThe formula for Ratio Analysis can be calculated by using the following steps: 1. Liquidity RatiosThese ratios indicate the company’s cash level, liquidity position and the capacity to meet its short-term liabilities. The formula of some of the major liquidity ratios are:
2. Solvency RatiosThese ratios indicate whether the company has the capability to meet its long-term obligations by comparing its debt level with its assets and equity etc. The formula of some of the major solvency ratios are:
3. Efficiency RatiosThese ratios indicate how efficiently a company is able to utilize its available assets or convert its inventories to cash. The formula of some of the major efficiency ratios are:
4. Profitability RatiosThese ratios demonstrate a company’s efficiency to use its assets to generate profits. The formula of some of the major profitability ratios are:
Example of Ratio Analysis Formula (With Excel Template)Let’s take an example to understand the calculation of Ratio Analysis in a better manner. Ratio Analysis Formula – Example #1Let us take the example of Apple Inc.’s annual report for 2019 to illustrate the calculation of different ratios used in ratio analysis. As per the latest annual report, the following information is available. Based on the given information, calculate the liquidity, solvency, efficiency and profitability ratios of Apple Inc. for the year 2019. Solution: Liquidity RatiosCurrent Ratio is calculated using the formula given below Current Ratio = Current Assets / Current Liabilities
Quick Ratio is calculated using the formula given below Quick Ratio = (Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities
Cash Ratio is calculated using the formula given below Cash Ratio = Cash & Cash Equivalents / Current Liabilities
Solvency RatiosDebt to Equity Ratio is calculated using the formula given below Debt to Equity Ratio = Total Debt / Total Equity
Debt Ratio is calculated using the formula given below Debt Ratio = Total Debt / Total Assets
Interest Coverage Ratio is calculated using the formula given below Interest Coverage Ratio = EBITDA / Interest Expense
Efficiency RatiosReceivables Turnover Ratio is calculated using the formula given below Receivables Turnover Ratio = Sales / Accounts Receivable
Inventory Turnover Ratio is calculated using the formula given below Inventory Turnover Ratio = COGS / Inventories
Payable Turnover Ratio is calculated using the formula given below Payable Turnover Ratio = COGS / Accounts Payable
Asset Turnover Ratio is calculated using the formula given below Asset Turnover Ratio = Sales / Total Assets
Net Fixed Asset Turnover Ratio is calculated using the formula given below Net Fixed Asset Turnover Ratio = Sales / Net Fixed Assets
Equity Turnover Ratio is calculated using the formula given below Equity Turnover Ratio = Sales / Total Equity
Profitability RatiosGross Margin is calculated using the formula given below Gross Margin = (Sales – COGS) / Sales
Operating Profit Margin is calculated using the formula given below Operating Profit Margin = EBIT / Sales
Net Margin is calculated using the formula given below Net Margin = Net income / Sales
Return on Total Asset (ROA) is calculated using the formula given below Return on Total Asset (ROA) = EBIT / Total Assets
Return on Total Equity (ROE) is calculated using the formula given below Return on Total Equity (ROE) = Net Income / Total Equity
Source Link: Apple Inc. Balance Sheet Relevance and Use of Reserve Ratio FormulaOne of the major uses of ratio analysis is that it makes it easier and simpler to compare companies with different scale of operations. Further, it also simplifies the analysis of the financial statements and helps in identifying deviation in historical trends. Recommended ArticlesThis is a guide to Ratio Analysis Formula. Here we discuss how to calculate the Ratio Analysis Formula along with practical examples. We also provide a downloadable excel template. You may also look at the following articles to learn more – |