Fin?n?i?l R?ti?? for R?ti? An?ly?i?

Fin?n?i?l R?ti?? for R?ti? An?ly?i? L?t’? ??? ??u want to buy a ??m??n?, h?w d? you tr??k the company’s fin?n?i?l h??lth? Or, what if you already ?wn th? ??m??n?, h?w d? ??u figure ?ut h?w w?ll, or h?w b?d that ??m??n? is d?ing?Thi? i? a ?u??ti?n every businessman or woman ??ks.Whether you ?wn yours, or int?r??t?d in buying ?n?, ??u n??d t? kn?w th?t what you are buying will yield profits.Thi? i? wh?r? fin?n?i?l r?ti?? plays a crucial role.Financial ratios h?l? a companys ?wn?r ?r it? ??t?nti?l ?nd current inv??t?r? better und?r?t?nd the overall h??lth of th? ??m??n? ?? w?ll as it? ??nditi?n in v?ri?u? ????ifi? ??t?g?ri??.In addition, tracking fin?n?i?l ratios ?v?r a ??ri?d ?f tim? i? a ??w?rful w?? t? identify tr?nd? in their early stages.R?ti?? ?r? ?l?? used b? l?nd?r? ?nd bu?in??? ?n?l??t? to d?t?rmin? a companys financial stability and ?t?nding. Its im??rt?nt to und?r?t?nd th?t fin?n?i?l r?ti?? ?r? tim? ??n?itiv?; th?? ??n only ?h?w a ?i?tur? of a business at a giv?n tim?. S? th? b??t w?? to u?? financial ratio s i? t? ??ndu?t a r?ti? analysis on a ??n?i?t?nt basis.Fin?n?i?l r?ti?? ?r? u??ful t??l? th?t h?l? ??m??ni?? ?nd investors ?n?l??? ?nd compare r?l?ti?n?hi?? b?tw??n different pieces of fin?n?i?l inf?rm?ti?n across ?n individu?l companys history, ?n industry, ?r ?n ?ntir? bu?in??? sector.Numbers t?k?n fr?m a companys income ?t?t?m?nt, b?l?n?? ?h??t, and cash fl?w statement ?ll?w ?n?l??t? t? ??l?ul?t? ??v?r?l t???? of fin?n?i?l r?ti?? f?r diff?r?nt kind? ?f bu?in??? intelligence ?nd inf?rm?ti?n. F?r r?ti?? to b? useful ?nd m??ningful, they must b?:C?l?ul?t?d u?ing r?li?bl?, ???ur?t? financial information (d??? your fin?n?i?l inf?rm?ti?n reflect ??ur tru? ???t picture?)C?l?ul?t?d ??n?i?t?ntl? from period to ??ri?dU??d in comparison to int?rn?l b?n?hm?rk? ?nd g??l?U??d in comparison t? other ??m??ni?? in ??ur indu?tr?Vi?w?d both ?t a ?ingl? ??int in tim? and as ?n indi??ti?n of broad tr?nd? ?nd i??u?? ?v?r tim?C?r?full? int?r?r?t?d in th? ?r???r ??nt?xt, ??n?id?ring th?r? are m?n? ?th?r im??rt?nt factors and indi??t?r? involved in ??????ing performance.FINANCIAL RATIOS CAN BE DIVIDED INTO FIVE CATEGORIES ACCORDING TO THE INFORMATION THEY PROVIDE1. Liquidit? or Solvency R?ti??A bu?in????? liquidity ?nd ??lv?n?? indi??t?s it? financial w?ll-b?ing, which ultim?t?l? measures th?t bu?in????? ?tr?ngths and sustainability.All ??m??ni?? are required to ??l?ul?t? their li?uidit? ?nd solvency fr?m tim? t? time, but especially wh?n d??l?ring a divid?nd, if a l??n is giv?n t? a director, ?h?r?h?ld?r ?r ?n int?rr?l?t?d entity, ?r in th? case of a merger.Th? Financial Advi??r? and Int?rm?di?r? Services A?t also r??uir?? that ?ll organisations, except th??? r?gi?t?r?d ?? a ??t?g?r? IV with th? Fin?n?i?l Services B??rd, conduct ?n annual ??????m?nt ?f its li?uidit? and solvency.“It is also g??d business ?r??ti?? f?r th? ?wn?r?, shareholders, directors ?r m?n?g?m?nt ?f ?n ?rg?ni??ti?n t? l??k at a ??m??n?’? li?uidit?, ???h flow ?nd current r?ti?? fr?m tim? t? tim? to d?t?rmin? the ‘g?n?r?l w?ll-b?ing’ ?f th? ?ntit?.It i? ????ibl? the first ?nd m??t ????nti?l ??????m?nt r??uir?d for making ??m? bu?in??? decisions â€" such ?? whether ?r n?t t? ?x??nd an ?nt?r?ri??, wh?th?r to inv??t ?x???? fund?, ?nd if funds ?r? needed fr?m external ??ur??? â€" for example.S?lv?n?? ?nd li?uidit? ?r? b?th t?rm? that r?f?r t? ?n enterprise’s state ?f fin?n?i?l h??lth, but with ??m? notable differences.Solvency r?f?r? t? ?n enterprises capacity t? m??t it? long-term financial ??mmitm?nt?.Li?uidit? r?f?r? t? ?n ?nt?r?ri??’? ?bilit? to ??? ?h?rt-t?rm ?blig?ti?n?; th? term ?l?? r?f?r? t? it? ????bilit? t? ??ll ????t? quickly to r?i?? cash.A ??lv?nt company is ?n? that ?wn? more th?n it ?w??; in other w?rd?, it h?? a ???itiv? n?t w?rth ?nd a manageable d?bt l??d.On the ?th?r h?nd, a company with ?d??u?t? liquidity m?? h?v? ?n?ugh cash ?v?il?bl? t? ??? it? bill?.S?lv?n?? and liquidity ?r? ??u?ll? important, ?nd h??lth? ??m??ni?? ?r? both solvent ?nd ??????? ?d??u?t? liqui dity.C?l?ul?ting S?lv?n??A k?? metric used to measure ?n ?nt?r?ri??’? ability to meet it? d?bt and other obligations i? th? S?lv?n?? R?ti? whi?h indicates wh?th?r a ??m??n?’? cash fl?w is sufficient to meet its ?h?rt-t?rm and l?ng-t?rm li?biliti??. The lower a ??m??n?? ??lv?n?? ratio, th? gr??t?r th? ?r?b?bilit? that it will d?f?ult ?n its d?bt ?blig?ti?n?,.The solvency r?ti? i? a comprehensive m???ur? ?f solvency, ?? it m???ur?? cash flow â€" r?th?r th?n n?t in??m? â€" b? including depreciation t? ?????? a ??m??n?’? capacity to ?t?? afloat. It m???ur?? thi? ???h flow ?????it? in r?l?ti?n t? ?ll liabilities, r?th?r th?n ?nl? debt.Apart from d?bt ?nd b?rr?wing?, ?th?r li?biliti?? in?lud? ?h?rt-t?rm ones ?u?h as ????unt? payable and l?ng-t?rm ones such ?? capital l???? ?nd ??n?i?n ?l?n ?blig?ti?n?.”M???uring ???h flow r?th?r th?n net income i? a better d?t?rmin?nt of ??lv?n??, especially f?r companies th?t in?ur l?rg? ?m?unt? ?f depreciation for th?ir ????t? but h?v? l?w level s ?f ??tu?l ?r?fit?bilit?.“Simil?rl?, assessing a company’s ?bilit? t? meet ?ll it? ?blig?ti?n? â€" r?th?r than d?bt ?l?n? â€" ?r?vid?? a m?r? ???ur?t? ?i?tur? of ??lv?n??. A company m?? h?v? a l?w d?bt ?m?unt, but if its cash m?n?g?m?nt ?r??ti??? ?r? ???r ?nd ????unt? ????bl? i? in?r???ing as a r??ult, it? solvency ???iti?n m?? not b? ?? solid ?? w?uld be indi??t?d b? m???ur?? that in?lud? only d?bt.”C?l?ul?ting LiquidityThe liquidity r?ti? ?f a company m???ur?? it? ?bilit? to pay its ?h?rt-t?rm debts. Th?r? ?r? thr?? common ??l?ul?ti?n? for li?uidit? ratios the ?urr?nt r?ti?, th? ??id r?ti?, ?nd th? ???h r?ti?.Th? ?urr?nt r?ti? indi??t?? a companys ability t? pay its current liabilities fr?m its ?urr?nt ????t?. Thi? is ?ft?n used t? ?ui?kl? m???ur? th? li?uidit? ?f a ??m??n?.Thi? method ??n?id?r? ?ll ?urr?nt ????t? ?nd current li?biliti??. Curr?nt assets are th??? ????t? th?t are ?x???t?d t? turn int? cash within one ???r or within the n?rm?l ???r?ting ???l? ?f the entity.E x?m?l?? of ?urr?nt assets are cash, ????unt? r???iv?bl?, ?nd ?r???id ?x??n???. Curr?nt liabilities are th??? d?bt? that ?r? ?x???t?d to be ??id or come du? within a ???r ?r in the n?rm?l operating ???l? ?f the ?ntit?â€" such ?? accounts payable and ???r?ll li?biliti??.”Th? ????nd r?ti? i? th? ??id ratio. Th? ?ur???? ?f thi? r?ti? is t? m???ur? h?w well a ??m??n? ??n meet it? ?h?rt-t?rm ?blig?ti?n? with it? most liquid ????t? th??? that ??n b? ?ui?kl? turn?d int? ???h.Th? fin?l r?ti? is th? ???h r?ti?, whi?h i? an indicator ?f a companys li?uidit? th?t further r?fin?? b?th th? ?urr?nt r?ti? and th? ?ui?k ratio by m???uring th? ?m?unt of ???h, ???h equivalents ?r inv??t?d fund? th?r? ?r? in ?urr?nt assets t? ??v?r ?urr?nt li?biliti??.2. Fin?n?i?l L?v?r?g? or D?bt RatiosFin?n?i?l l?v?r?g? r?ti?? ?r? ?l?? ??ll?d d?bt ratios. You m?? also find th?m ??ll?d long-term ??lv?n?? r?ti??.Th?? measure th? ability ?f th? bu?in??? t? m??t its long-term d?bt ?blig?ti?n?, ?u?h ?? int?r??t ???m?nt ? on d?bt, th? fin?l principal ???m?nt ?n d?bt, ?nd any ?th?r fixed ?blig?ti?n? like lease payments. L?ng-t?rm debt i? d?fin?d ?? ?blig?ti?n? t? r???? with a maturity of m?r? than ?n? year.Th??? r?ti?? ??m??r? th? overall debt l??d of a company to its ????t? or ??uit?, ?h?wing h?w much ?f th? company ????t? b?l?ng t? shareholders v?. creditors.If ?h?r?h?ld?r? own more ????t?, th? ??m??n? i? ??id t? be l??? l?v?r?g?d. If creditors ?wn a m?j?rit? ?f ????t?, th? company i? ??id to b? highl? l?v?r?g?d. Clearly, financial leverage r?ti?? h?l? m?n?g?m?nt and inv??t?r? to und?r?t?nd th? risk l?v?l ?f th? ???it?l ?tru?tur? of a company.L?t? look ?t a f?w of the m??t im??rt?nt ?n??.D?bt R?ti?Th? d?bt ratio m???ur?? a ??m??n?? t?t?l liabilities ?g?in?t it? t?t?l ????t? and is expressed ?? a ??r??nt?g?. It im?li?? the ??m??n?? ?bilit? to ??ti?f? it? li?biliti?? with it? ????t?, ?r h?w m?n? ????t? th? company mu?t ??ll t? pay ?ll it? liabilities. It shows th? companys ?v?r?ll d?bt burd?n.The d? bt ratio i? ??l?ul?t?d b? dividing t?t?l li?biliti?? b? t?t?l ????t?. B?th ?f th??? numb?r? can ???il? b? found on th? balance ?h??t.A lower r?ti?, .5% ?r l???, i? ???n ?? f?v?r?bl?, indi??ting ?t?bilit? and l?ng?vit?. A r?ti? ?f 1 m??n? th?t t?t?l liabilities ??u?l? t?t?l ????t?. In ?th?r words, the company w?uld h?v? t? ??ll ?ff all ?f it? assets in order t? ??? ?ff it? li?biliti??.D?bt t? Equity R?ti?Th? debt t? ??uit? ratio ??m??r?? a ??m??n?? total d?bt to t?t?l ??uit?, indi??ting th? percentage ?f company fin?n?ing that ??m?? fr?m ?r?dit?r? and inv??t?r?.A higher d?bt to ??uit? r?ti? indi??t?? th?t more creditor financing (b?nk l??n?) is used th?n investor financing (shareholders).Th? debt to equity r?ti? i? ??l?ul?t?d by dividing total li?biliti?? by t?t?l ??uit?. Th? d?bt t? ??uit? ratio i? considered a b?l?n?? sheet r?ti? because ?ll ?f th? elements are reported ?n th? b?l?n?? sheet. A d?bt t? ??uit? r?ti? of 1 w?uld m??n that investors ?nd creditors have ?n equal stake in th? bu?in??? assets. A l?w?r d?bt to ??uit? ratio u?u?ll? im?li?? a m?r? fin?n?i?ll? ?t?bl? business.E?uit? RatioTh? Equity r?ti? m???ur?? th? amount of ????t? that ?r? fin?n??d b? ?wn?r? investments by ??m??ring the total ??uit? in the ??m??n? t? th? total ????t?. In other w?rd?, ?ft?r all ?f the liabilities are ??id off, h?w mu?h ?f the remaining ????t? the inv??t?r? will ?nd up with.   Th? equity r?ti? ?l?? m???ur?? h?w mu?h ?f a firm? ????t? w?r? financed b? inv??t?r?, ?r the inv??t?r? ?t?k? in th? company.Th? ??uit? ratio i? calculated b? dividing t?t?l ??uit? b? total ????t?. All ?f the ????t? and ??uit? reported ?n th? b?l?n?? ?h??t ?r? in?lud?d in th? ??uit? ratio calculation. A high?r ??uit? r?ti? i? seen as f?v?r?bl? because it ?h?w? that inv??t?r? h?v? confidence and ?r? willing t? b??k thi? company ?nd th?t th? ??m??n? i? m?r? ?u?t?in?bl? ?nd less ri?k?.Th??? fin?n?i?l leverage r?ti?? ?ll?w th? ?wn?r ?f th? bu?in??? t? d?t?rmin? how w?ll the business can meet it? l?ng-t? rm d?bt ?blig?ti?n?. Th??? ratios ?r? w?rth nothing, ?r very little, in i??l?ti?n. Y?u h?v? t? be ?bl? t? d? tr?nd and indu?tr? analysis to b? able t? d?t?rmin? how w?ll ??u ?r? m?n?ging ??ur d?bt ???iti?n.Th? financial l?v?r?g? ?r d?bt r?ti?? f??u? ?n a firm? ability to m??t it? l?ng-t?rm d?bt ?blig?ti?n?.It looks at th? firm? l?ng term li?biliti?? on th? balance sheet such as b?nd?.Th? most ??mm?n fin?n?i?l l?v?r?g? r?ti?? are th? t?t?l d?bt r?ti??, the d?bt/??uit? r?ti?, th? l?ng-t?rm d?bt r?ti?, th? tim?? int?r??t earned ratio, th? fix?d ?h?rg? coverage ratio, and the ???h ??v?r?g? r?ti?.Alth?ugh ?ll ?lightl? diff?r?nt, these fin?n?i?l leverage ratios ?ll t?ll ??u about different ?????t? ?f th? ??m??n?? overall fin?n?i?l h??lth ?nd, in m??t in?t?n???, quantify ?h?r?h?ld?r equity.3. A???t Effi?i?n?? ?r Turn?v?r R?ti??Th? ????t turnover r?ti?, ?l?? known ?? the total ????t turn?v?r r?ti?, m???ur?? th? ?ffi?i?n?? with whi?h a ??m??n? u??? it? ????t? to generate ??l??. Th? ????t tur nover ratio f?rmul? is ??u?l to net ??l?? divid?d by the t?t?l or ?v?r?g? ????t? ?f a ??m??n?.A ??m??n? with a high ????t turn?v?r ratio operates more efficiently compared t? ??m??tit?r? with l?w?r ratios.A???t Turn?v?r R?ti? F?rmul?Th? f?rmul? for the r?ti? i? as follows: Wh?r?:N?t ??l?? ?r? the ?m?unt ?f r?v?nu? g?n?r?t?d after deducting sales r?turn?, sales discounts, ?nd sales ?ll?w?n???.Average t?t?l assets ?r? th? ?v?r?g? of ?ggr?g?t? ????t? at the ?nd ?f th? current year and preceding ???r. N?t?: ?n ?n?l??t may u?? ?ith?r ?v?r?g? or ?nd-?f-??ri?d assets.Example ?f A???t Turnover RatioC?m??n? A r???rt?d beginning t?t?l ????t? ?f $199,500 ?nd ending t?t?l ????t? ?f $199,203. Ov?r the same ??ri?d, th? company g?n?r?t?d ??l?? of $325,300 with ??l?? returns ?f $15,000.Th? ????t turn?v?r r?ti? f?r C?m??n? A i? calculated ?? follows: Th?r?f?r?, for ?v?r? dollar in t?t?l ????t?, C?m??n? A g?n?r?t?d $1.5565 in ??l??.C?m??ri??n? ?f A???t Turnover R?ti??Consider f?ur hypothetical companies: C?m??n? A, C?m??n? B, C?m??n? C, and C?m??n? D. C?m??ni?? A and B ???r?t? in the f??t-f??d indu?tr?, while ??m??ni?? C ?nd D ???r?t? in th? t?l???mmuni??ti?n? indu?tr?:F??t f??dT?l???mmuni??ti?n?(In dollars)Company ACompany BC?m??n? CC?m??n? DBeginning A???t?$54,341$250,000$75,340$132,434Ending A???t?$55,421$252,000$77,506$134,545Av?r?g? T?t?l A???t?$54,881$251,000$76,423$133,490Net ??l??$43,141$212,134$54,231$75,654Asset Turnover Ratio0.790.850.710.57Th? ????t turnover r?ti? f?r ???h company i? ??l?ul?t?d as net ??l?? divid?d by ?v?r?g? t?t?l assets.A???t ratio ??m??ri??n? across markedly diff?r?nt industries do n?t provide a g??d in?ight into h?w w?ll a ??m??n? i? doing. For ?x?m?l?, it w?uld b? in??rr??t to ??m??r? th? ????t turn?v?r ratio ?f C?m??n? A t? that ?f Company C, ?? th?? operate in different industries.It i? ?nl? ??? r??ri?t? t? ??m??r? th? ????t turnover r?ti? ?f ??m??ni?? ???r?ting in the ??m? industry. In ?u?h ?????, w? can ??? th?t Company B operates more efficiently th?n C?m??n? A.Thi? m?? indicate th?t C?m??n? A i? ?x??ri?n?ing ???r sales ?r that it? fix?d assets ?r? not being utiliz?d t? th?ir full ?????it?.Interpretation ?f the Asset Turnover RatioTh? asset turn?v?r r?ti? m???ur?? how ?ffi?i?ntl? a ??m??n? is u?ing assets t? generate ??l??.Therefore, a high?r r?ti? is f?v?r?bl?, ?? it indi??t?? a more efficient use ?f ????t?.Conversely, a l?w?r r?ti? indicates that th? ??m??n? i? n?t using assets ?? ?ffi?i?ntl? ?? it might. Thi? can be due t? excess production capacity, ???r ??ll??ti?n m?th?d?, ?r ???r inv?nt?r? m?n?g?m?nt.It is im??rt?nt t? ??m??r? the r?ti?? b?tw??n ??m??ni?? operating in th? ??m? indu?tr?, as th? b?n?hm?rk ????t turnover r?ti? v?ri?? gr??tl? depending on the indu?tr?.Industries with a l?w ?r?fit margin t?nd t? g?n?r?t? a high?r r?ti? ?nd ???it?l-int?n?iv? indu?tri?? t ?nd to r???rt a lower r?ti?.Key T?k??w???Th? asset turnover ratio i? ?n ?ffi?i?n?? r?ti? th?t measures h?w ?ffi?i?ntl? a company is u?ing its ????t? to g?n?r?t? sales.C?m??ring th? ????t turn?v?r r?ti?? ?f companies in diff?r?nt industries is n?t ???r??ri?t?, ?? industries vary in ???it?l int?n?iv?n???.A higher ratio, b?tw??n companies in th? same indu?tr?, i? generally ?lw??? f?v?r?bl?, as it indi??t?? ?n efficient u?? of ????t?.A l?w?r ratio, comparing ??m??ni?? in the ??m? indu?tr?, indi??t?? ???r ?ffi?i?n??, which may b? du? t? ???r utiliz?ti?n ?f fix?d assets, poor collection m?th?d?, ?r poor inv?nt?r? m?n?g?m?nt.Th? ????t efficiency ?r turn?v?r ratios m???ur? the ?ffi?i?n?? with whi?h th? firm uses it? assets t? ?r?du?? ??l??. A? a r??ult, it f??u??? ?n both th? income ?t?t?m?nt (??l??) and th? b?l?n?? sheet (assets).Th? m??t common ????t ?ffi?i?n?? ratios ?r? the inventory turnover r?ti?, th? r???iv?bl?? turnover ratio, th? days ??l?? in inventory r?ti?, the days ??l?? in rec eivables r?ti?, the n?t w?rking capital r?ti?, the fix?d ????t turn?v?r r?ti?, ?nd th? t?t?l ????t turnover r?ti?.Th? ????t ?ffi?i?n?? r?ti?? are ??rti?ul?rl? v?lu?bl? in describing the bu?in??? fr?m a d?n?mi? vi?w??int. U??d t?g?th?r, th?? d???rib? how well th? business i? b?ing run h?w fast it? ?r?du?t? ?r? selling, how l?ng customers t?k? to pay and h?w mu?h ???it?l i? ti?d u? in inv?nt?r?.4. Profitability R?ti??Th? profitability r?ti?? ?r? ju?t wh?t th? name im?li??. Th?? f??u? ?n th? firm? ?bilit? to g?n?r?t? a ?r?fit ?nd ?n ?d??u?t? r?turn ?n assets ?nd equity.Th?? measure how ?ffi?i?ntl? th? firm u??? it? ????t? ?nd how ?ff??tiv?l? it manages its ???r?ti?n? ?nd ?n?w?r ?u?h b??i? questions as H?w ?r?fit?bl? i? this bu?in???? ?nd How d??? it m???ur? u? t? its ??m??tit?r??Pr?fit?bilit? r?ti?? ?r? a set of m???ur?m?nt? used to d?t?rmin? the ?bilit? ?f a bu?in??? t? create ??rning?. Th??? r?ti?? are ??n?id?r?d t? b? favorable wh?n they im?r?v? over a trend lin? ?r ?r? comparative ly better th?n the results of ??m??tit?r?.Pr?fit?bilit? ratios are d?riv?d from a comparison ?f r?v?nu?? t? diff?r?n?? gr?u?ing? ?f ?x??n??? within the in??m? statement.The m?in ratios are as follows:Contribution m?rgin r?ti?: Subtracts all v?ri?bl? ?x??n??? in th? in??m? statement fr?m ??l??, and th?n divid?? the r??ult b? sales. Thi? i? u??d to d?t?rmin? th? ?r???rti?n of ??l?? still available after all v?ri?bl? ???t? t? pay f?r fixed ???t? ?nd g?n?r?t? a ?r?fit. Thi? i? u??d for breakeven ?n?l??i?.Gr??? profit r?ti?: Subtr??t? ?ll ???t? r?l?t?d t? th? ???t of g??d? ??ld in the in??m? statement from ??l??, ?nd th?n divid?? th? r??ult by sales. Thi? i? u??d to determine th? ?r???rti?n ?f sales ?till ?v?il?bl? ?ft?r g??d? and services h?v? b??n ??ld t? ??? f?r ??lling ?nd ?dmini?tr?tiv? ???t? ?nd g?n?r?t? a ?r?fit. This r?ti? in?lud?? th? allocation ?f fix?d costs to th? cost ?f g??d? sold, ?? th?t the r??ult tends t? yield a ?m?ll?r ??r??nt?g? th?n the contribution m?rgin r?ti?.N?t profit r?ti?: Subtr??t? all ?x??n??? in the in??m? ?t?t?m?nt fr?m ??l??, and then divid?? th? result by sales. This i? u??d t? d?t?rmin? the net amount ?f ??rning? g?n?r?t?d in a reporting ??ri?d, net of in??m? t?x??. If th? ???ru?l basis ?f ????unting is u??d, thi? ??n r??ult in a figur? th?t is diff?r?nt fr?m wh?t ???h fl?w? would indicate, du? t? the ???ru?l ?f expenses th?t h?v? n?t ??t ???urr?d.A different ?l??? ?f profitability ratios ??m??r? th? results listed on th? income ?t?t?m?nt to th? inf?rm?ti?n ?n th? b?l?n?? ?h??t.The int?nt ?f these m???ur?m?nt? i? t? examine the efficiency with which m?n?g?m?nt ??n ?r?du?? profits, in ??m??ri??n t? th? amount of ??uit? or ????t? ?t th?ir disposal. If th? outcome ?f th??? m???ur?m?nt? i? high, it im?li?? th?t r???ur?? usage h?? b??n minimiz?d.Th? main ratios in thi? ??t?g?r? ?r?:R?turn ?n assets: Divides n?t ?r?fit? by th? t?t?l ?m?unt ?f ????t? on th? balance sheet. The m???ur?m?nt can be im?r?v?d b? u?ing a tight ?r?dit policy to r?du?? th? amount of accounts receivable, a ju?t-in-tim? ?r?du?ti?n ???t?m to r?du?? inv?nt?r?, ?nd b? selling ?ff fix?d ????t? th?t are r?r?l? u??d. Th? r??ult varies by indu?tr?, ?in?? ??m? indu?tri?? r??uir? f?r m?r? ????t? th?n ?th?r?.R?turn on ??uit?: Divid?? n?t ?r?fit? b? th? t?t?l ?m?unt ?f equity ?n the b?l?n?? ?h??t. Th? m???ur?m?nt can b? im?r?v?d b? funding a larger ?h?r? ?f ???r?ti?n? with d?bt, ?nd b? u?ing d?bt t? buy b??k shares, th?r?b? minimizing th? use of ??uit?. D?ing so can b? risky, if a bu?in??? d??? not experience ?uffi?i?ntl? ??n?i?t?nt ???h flows t? pay off th? d?bt.Wh?n u?ing profitability r?ti??, it i? b??t to ??m??r? a ??m??n?? r??ult? f?r the ?urr?nt ??ri?d to the r??ult? for th? ??m? ??ri?d in th? ?r???ding year. Th? r????n i? th?t m?n? ?rg?niz?ti?n? have ?????n?l sales, which ??u??? th?ir profitability r?ti?? t? vary considerably ?v?r th? ??ur?? ?f a ???r.5. M?rk?t V?lu? R?ti??Th? market v?lu? r?ti?? can b? calculated f?r ?ubli?l? traded ??m??ni?? ? nl? ?? they relate t? ?t??k ?ri??. M?rk?t value r?ti?? help ?v?lu?t? the economic status of ?ubli?l? tr?d?d ??m??ni?? and ??n ?l?? a role in identifying ?t??k? th?t m?? b? ?v?rv?lu?d, und?rv?lu?d, ?r priced f?irl?.Alth?ugh a wid? variety ?f m?rk?t value r?ti?? ?r? in use, the m??t popular in?lud? ??rning? ??r ?h?r?, book value ??r share, ?nd th? ?ri??-??rning? r?ti?. Oth?r? include the price/cash r?ti?, divid?nd ?i?ld ratio, m?rk?t v?lu? per share, ?nd th? market/book r?ti?.E??h of th??? m???ur?? i? u??d in a different way, but when combined, th?? ?ff?r a ?r?tt? ???ur?t? fin?n?i?l ??rtr?it of ?ubli?l? traded companies. In addition, m?rk?t value ratios can h?l? giv? m?n?g?m?nt ?n id?? ?f what a firms investors think of it? performance and futur? ?r?????t?.Th??r? ?l?? u??d to analyze ?t??k trends, ?lth?ugh ??m? ??nt?xt i? necessary. F?r example, a companys l?w ?ri??-??rning? r?ti? m?? indicate th? stock i? ?n und?rv?lu?d b?rg?in in a ?t?bl? indu?tr?, but it ?l?? ??uld indi??t? th? com panys ??rning? prospects ?r? r?l?tiv?l? un??rt?in, and th? ?t??k m?? be a ri?k? b?t.Th?t? wh? you ?lw??? ?h?uld consider v?ri?u? f??t?r?, including a r?ng? ?f m?rk?t value r?ti??, when m?king a d??i?i?n ?b?ut an inv??tm?nt. A ?t??k with one gr??t-l??king m???ur? could b? ?n undiscovered g?m, or it ??uld b? a dud th?t? under-priced f?r a reason.E?rning? P?r Sh?r?E?rning? ??r ?h?r? m???ur?? a companys n?t in??m? per ?h?r? ?f ?ut?t?nding stock, indi??ting a ??m??n?? ?r?fit?bilit? to inv??t?r?.Calculate earnings per ?h?r? b? dividing th? ??m??n?? n?t income by th? number ?f ?ut?t?nding shares (stock ?urr?ntl? h?ld by ?ll shareholders).F?r example, if a ??m??n? h?? $10 milli?n in net in??m? ?nd 4 milli?n ?ut?t?nding ?h?r??, th? earnings per ?h?r? w?uld be $10 million divid?d by 4 milli?n, whi?h is $2.50.Book V?lu? Per ShareTh? book v?lu? is a ??m??n?? equity th?t does not in?lud? ?r?f?rr?d stock divid?d b? the ?h?r?? ?ut?t?nding in the m?rk?t.F?r ?x?m?l?, if a companys t?t?l assets equal $15 milli?n ?nd it? t?t?l liabilities ??u?l $5 million, th? t?t?l equity would b? $10 milli?n. If the ??m??n? h?? $2 milli?n in preferred ?t??k, d?du?t th?t t? get $8 milli?n, th? ?m?unt ?v?il?bl? t? common shareholders. If th?r? are 1 million ?ut?t?nding ?h?r??, the b??k v?lu? ??r ?h?r? would be $8, or $8 million divided b? 1 milli?n.M?rk?t V?lu? Per Sh?r?Market v?lu? ??r ?h?r? i? the m?rk?t v?lu? ?f a ??m??n? divid?d by th? t?t?l numb?r ?f ?ut?t?nding ?h?r??. Thi? ?uit? ?im?l? i? the g?ing r?t? f?r a ?h?r? ?f common ?t??k.The m?rk?t v?lu? ?f th? ??m??n? can b? determined by multi?l?ing th? ?ri?? ?f it? ??mm?n ?t??k b? th? numb?r of ?ut?t?nding shares.Market/Book (M/B) RatioWith the m?rk?t/b??k r?ti?, ?n?l??t? ??n ??m??r? a companys market v?lu? to it? b??k v?lu?, Th? r?ti? can be ??l?ul?t?d b? dividing th? market v?lu? ??r ?h?r? by th? b??k value ??r ?h?r?.For example, if a ??m??n? has a b??k v?lu? ??r ?h?r? ?f $8 ?nd th? ?t??k ?urr?ntl? i? v?lu?d at $10 ??r ?h?r?, th? M/B r?ti? w?uld b? calculated b? dividing $10 (?t??k price) b? $8 (b??k v?lu? per ?h?r?).Thi? would give ??u a r?ti? ?f 1.25. In other words, th? m?rk?t v?lu? of a ?h?r? of ?t??k i? 25 ??r??nt gr??t?r th?n its b??k v?lu?. A r?ti? ?f l??? than 1 ??n m??n a ?t??k might b? undervalued, whil? a r?ti? gr??t?r th?n 1 might mean it i? ?v?rv?lu?d.Pri??-E?rning? (P/E) R?ti?The ?ri??-??rning? ratio i? th? ?urr?nt ?ri?? ?f th? stock divid?d b? th? earnings ??r ?h?r?. E?rning? g?n?r?ll? are calculated b? looking ?t th? last four ?u?rt?r? ?f fin?n?i?l r??ult?.F?r ?x?m?l?, if a ?t??k i? tr?ding ?t $25 per share ?nd their ??rning? ??r share i? $2.50, the P/E ratio w?uld b? $25 divided by $2.50, whi?h ??u?l? a ratio of 10-t?-1.An?l??t? also m?? talk ?b?ut a f?rw?rd P/E r?ti?, which i? the ??tim?t?d P/E r?ti? f?r th? n?xt four quarters.Pri??/C??h RatioThe ?ri??/???h r?ti? ??m??r?? th? price of a companys stock to it? cash flow.To ??l?ul?t? this r?ti?, simply divid? th? m?rk?t v?lu? of a ?h?r? b? the ?m?unt ?f ???h fl?w ??r ?h?r?. Cash fl?w per share i? the ?m?unt ?f ???h a company has on h?nd ?ft?r t?king depreciation into ????unt.For example, if th? ?ri?? of a ??m??n?? ?t??k is $20 per ?h?r? ?nd th? ??m??n? has cash flow ?f $10 ??r ?h?r?, the ?ri??/???h r?ti? w?uld be $20 divid?d b? $10, whi?h ??u?l? 2. T??i??ll?, a lower numb?r h?r? is b?tt?r because th?t means gr??t?r cash fl?w.Divid?nd Yield R?ti?An?l??t? arrive at th? divid?nd ?i?ld ratio b? dividing the t?t?l dividend payments paid per ???r b? the m?rk?t ?ri?? ?f th? stock.For ?x?m?l?, if a ??m??n? pays out divid?nd? ?u?rt?rl? in th? ?m?unt? ?f $2.25, $2.50, $2.50, ?nd $2.75, th? t?t?l divid?nd ???m?nt? f?r th? ???r would be $10. If the price of th? stock i? $100, ??u w?uld divid? $10 (dividend payments) by $100 (?t??k price).The ?n?w?r i? 0.10, ?r 10 ??r??nt.Kn?wing thi? ratio h?l?? you to b?tt?r und?r?t?nd th? return on your inv??tm?nt ??u ??n r??li?ti??ll? ?x???t.Who ?r? the u??r? of financial r?ti???Financial ratio ?n?l??i? is aimed t? ?????? th? fin?n?i?l ??rf?rm?n?? ?nd d?t?rmin? th? fin?n?i?l ???iti?n ?f ?n organization thr?ugh it? profitability, liquidity, ??tivit?, l?v?r?g? and ?th?r relevant indi??t?r?.Th?r? ?r? many groups and individuals with diverse and conflicting interests but w?nt t? kn?w ?b?ut th? bu?in??? ??rf?rm?n?? ?r position. In the following t?bl? major u??r? ?f financial ?t?t?m?nt? with th?ir areas ?f interest ?r? d???rib?d.Bankers ?nd L?nd?r?: Use ?r?fit?bilit?, li?uidit? and investment b???u?? they want t? know the ability ?f the b?rr?wing business in r?gul?r ??h?dul?d int?r??t ???m?nt? and r????m?nt? ?f ?rin?i??l loan ?m?unt.Investors: U?? profitability and investment b???u?? they are m?r? interested in ?r?fit?bilit? ??rf?rm?n?? ?f bu?in??? ?nd safety ???urit? ?f their investment ?nd growth potential of th?ir investment.G?v?rnm?nt: Use profitability b???u?? government m?? u?? ?r?fit ?? a b??i? for t?x?ti?n, gr?nt? and ?ub?idi??.Employees: Use profitability, li?uidit? ?nd activity b???u?? ?m?l????? will b? ??n??rn?d with j?b security, b?nu? ?nd ??ntinu?n?? of bu?in??? ?nd w?g? b?rg?ining.Customers: U?? li?uidit? because customers will seek reassurance that the bu?in??? can ?urviv? in the short t?rm and continue to ?u??l?.Su??li?r?: U?? li?uidit? because suppliers ?r? m?r? interested in knowing the ?bilit? ?f th? bu?in??? t? settle its short-term obligations ?? and wh?n they ?r? due.M?n?g?m?nt: Use ?ll r?ti?? because m?n?g?m?nt is int?r??t?d in ?ll ?????t? i.?., b?th fin?n?i?l performance and fin?n?i?l ??nditi?n of the bu?in???.Suppliers: Suppliers will want t? kn?w if their customers ??n ?ff?rd t? ??? their bill?. Th?? will l??k ?t th? ???h in th? business. Liquidity R?ti?? th?t ?n?l??? li?uidit? will help. Examples of th??? in?lud? the ?urr?nt r?ti? and quick r?ti?.Own?r?: Own?r? ?f th? bu?in??? m?? want t? review how sales ?r? performing, ?? th? r?turn ?n ??l?? ratio m?? b? im??rt?nt. Th?? will want to check ?r?fit?bilit? r?ti??. How g??d ?r? th? gross ?r?f it margins ?nd n?t ?r?fit m?rgin??Of course cash fl?w i? ?xtr?m?l? im??rt?nt ?? a k?? area ?f f??u? will b? ?n th? w?rking ???it?l ratios. Th??? m?? in?lud? th? trade accounts receivable ratio, tr?d? accounts ????bl? r?ti? ?nd inv?nt?r? turn?v?r ratio.M?n?g?r?/Dir??t?r?: Int?rn?l u??r? ?f ????unting inf?rm?ti?n will ?f ??ur?? in?lud? key m?n?g?r? ?nd dir??t?r? in th? bu?in???. Th?? m?? n??d th?ir own d???rtm?nt/divi?i?n inf?rm?ti?n. Thi? mix f?r example may inv?lv? ?r?fit?bilit? r?ti??, ??l?? r?ti??, earnings ratios, d?bt/??uit? ratios, cash ??ll??ti?n ??ri?d?, ????unt? ????bl? d???.LIMITATIONS OF RATIO ANALYSISR?ti? ?n?l??i?, with?ut a d?ubt, i? ?m?ng?t th? m??t powerful t??l? for fin?n?i?l ?n?l??i?.An? inv??t?r, who w?nt? to be m?r? ?ffi?i?nt at th?ir j?b, mu?t d?v?t? more tim? towards und?r?t?nding r?ti?? ?nd ratio ?n?l??i?.H?w?v?r, thi? does not m??n th?t it is fr?? ?f limit?ti?n?. Like all techniques, fin?n?i?l r?ti?? h?v? th?ir limit?ti?n? t??.R?ti? analysis i? treated as a kn ife. If a knife i? u??d by a d??t?r, h?/?h? ??n ??v? th? lif? ?f hum?n beings during the operation. At th? ??m? tim?, a knife is u??d b? a kitchen master, he/she ??n cut th? fruit? and v?g?t?bl?? f?r early ??m?l?ti?n ?f th? f??d ?r???r?ti?n.Lik?wi??, a knife i? u??d b? ?ul?rit, he/she can put ?n ?nd t? lif? ?f human b?ing.H?n??, it i? n?ti??d th?t und?ubt?dl?, r?ti? ?n?l??i? i? a tool ?v?il?bl? in th? hands of ?n?l??t ?nd th? ?ignifi??n?? ?f ratio ?n?l??i? i? b???d ?n it? u??g?.“The ratio ?n?l??i? i? ?n ?id t? m?n?g?m?nt in t?king ?r?dit decisions but ?? a mechanical ?ub?titut? f?r thinking ?nd judg?m?nt, it is w?r?? than u??l???”. Hunt, Willi?m? ?nd DonaldsonR?ti? analysis ?uff?r? fr?m ??rt?in limitations ?v?n th?ugh th?? are ???il? calculated ?nd und?r?t??d. Such limitations are given b?l?w.Misleading Fin?n?i?l St?t?m?nt?The fir?t and foremost thr??t t? r?ti? analysis i? d?lib?r?t? mi?l??ding ?t?t?m?nt? i??u?d by the m?n?g?m?nt.The m?n?g?m?nt ?f most ??m??ni?? i? aware that in v??t?r? l??k at certain numb?r? lik? sales, earnings, ???h fl?w etc very ??ri?u?l?. Oth?r numb?r? on th? fin?n?i?l ?t?t?m?nt? d? not g?t ?u?h ?tt?nti?n. They th?r?f?r? m?ni?ul?t? th? numb?r? within the l?g?l framework t? m?k? im??rt?nt m?tri?? l??k g??d.Thi? i? a common ?r??ti?? ?m?ng?t publically li?t?d ??m??ni?? ?nd is called “Wind?w Dr???ing”. Investors need t? b? ?w?r? ?f such window dr???ing ?nd mu?t be careful in calculating and int?r?r?ting r?ti?? b???d ?n th??? numb?r?.In??m??r?bilit?C?m??ri??n i? th? ?rux ?f ratio analysis. On?? ratios h?v? b??n calculated, th?? n??d t? b? ??m??r?d with ?th?r ??m??ni?? ?r over tim?.However, many tim?? ??m??ni?? h?v? accounting ??li?i?? th?t d? n?t m?t?h with ???h ?th?r.Thi? m?k?? it im????ibl? t? have ?n? m??ningful r?ti? ?n?l??i?. R?gul?t?r? ?ll ?v?r th? w?rld ?r? ?triving t? make fin?n?i?l ?t?t?m?nt? ?t?nd?rdiz?d.H?w?v?r in m?n? ?????, ??m??ni?? can ?till ?h???? ????unting ??li?i?? whi?h will make th?ir statements incomparable.Qualita tive FactorsC?m??ri??n ?v?r time is ?n?th?r im??rt?nt t??hni?u? used in r?ti? analysis. It i? ??ll?d horizontal analysis. H?w?v?r, m?n? tim?? comparison ?v?r tim? i? m??ningl??? b???u?? of inflation.Tw? ??m??ni?? m?? b? u?ing th? ??m? m??hin? with th? ??m? ?ffi?i?n?? but one will h?v? a b?tt?r r?ti? because it b?ught th? m??hin? earlier at a l?w ?ri??.Al??, ?in?? the m??hin? w?? ?ur?h???d earlier, it may b? ?l???r to impairment. But th? ratio d??? n?t r?fl??t thi?.Subj??tiv? Int?r?r?t?ti?nFin?n?i?l r?ti?? ?r? established “thumb of rul??” ?b?ut the w?? a business should operate.H?w?v?r ??m? ?f th??? rul?? ?f thumb have b???m? obsolete. Th?r?f?r? when ??m??ni?? come with a n?w kind ?f bu?in??? m?d?l, r?ti?? ?h?w th?t th? ??m??n? i? n?t a g??d inv??tm?nt. In reality th? company i? ju?t “un??nv?nti?n?l”.M?n? may ?v?n ??ll these ??m??ni?? inn?v?tiv?. R?ti? ?n?l??i? of ?u?h ??m??ni?? does not ?r?vid? m??ningful inf?rm?ti?n. Inv??t?r? must l??k furth?r to make their decisions.F?l?? R??ult? if B???d on In??rr??t A???unting DataA???unting r?ti?? ??n b? ??rr??t only if th? d?t? (?n which th?? ?r? based) ?r? ??rr??t. S?m?tim??, the inf?rm?ti?n given in th? financial ?t?t?m?nt? i? affected b? wind?w dr???ing, i.?., showing ???iti?n b?tt?r than what actually is.F?r ?x?m?l?, if inv?nt?r? v?lu?? ?r? infl?t?d ?r depreciation i? n?t ?h?rg?d ?n fix?d assets, not only will ?n? have an ??timi?ti? vi?w ?f profitability ?f the ??n??rn but ?l?? of its fin?n?i?l ???iti?n.S? th? ?n?l??t mu?t ?lw??? b? ?n th? l??k-?ut for ?ign? ?f wind?w dressing if any.No Idea ?f Pr?b?bl? Happenings in FutureR?ti?? are ?n attempt t? make ?n analysis ?f the ???t fin?n?i?l ?t?t?m?nt?; so they are hi?t?ri??l d??um?nt?.Now-a-days keeping in vi?w th? ??m?l?xiti?? ?f the business, it i? im??rt?nt t? h?v? an id?? ?f the ?r?b?bl? happenings in future.Variation in A???unting M?th?d?The tw? firms’ r??ult? ?r? comparable with the h?l? of ????unting ratios ?nl? if th?? f?ll?w the same accounting methods or b????. C?m??ri??n will b???m? difficult if th? tw? ??n??rn? f?ll?w the different m?th?d? of providing d??r??i?ti?n or valuing ?t??k.Simil?rl?, if th? tw? firm? ?r? f?ll?wing tw? diff?r?nt ?t?nd?rd? and m?th?d?, ?n ?n?l??i? by r?f?r?n?? t? th? r?ti?? w?uld b? mi?l??ding. M?r??v?r, utilisation ?f inbuilt f??iliti??, ?v?il?bilit? ?f f??iliti?? ?nd ???l? of ???r?ti?n would affect fin?n?i?l ?t?t?m?nt? ?f diff?r?nt firm?.C?m??ri??n ?f fin?n?i?l ?t?t?m?nt? ?f ?u?h firm? by m??n? of r?ti?? i? b?und to be misleading.Price Level ChangesChanges in ?ri?? l?v?l? make comparison f?r v?ri?u? ???r? diffi?ult. F?r ?x?m?l?, the r?ti? ?f ??l?? to t?t?l ????t? in 1996 w?uld be mu?h higher than in 1982 due t? rising ?ri???, fix?d ????t? being ?h?wn ?t ???t ?nd n?t ?t market ?ri??.Only On? Method ?f An?l??i?R?ti? analysis i? only a b?ginning and giv?? just a fr??ti?n ?f inf?rm?ti?n needed f?r d??i?i?n-m?king. So, t? h?v? a ??m?r?h?n?iv? analysis ?f financial ?t?t?m?nt?, ratios should be u??d along wi th ?th?r methods of analysis.No C?mm?n St?nd?rd?It i? very diffi?ult to lay d?wn a ??mm?n ?t?nd?rd f?r comparison b???u?? ?ir?um?t?n??? differ fr?m concern to concern and the n?tur? ?f each indu?tr? is diff?r?nt. F?r ?x?m?l?, a bu?in??? with current ratio ?f m?r? th?n 2:1 might not be in a ???iti?n to pay ?urr?nt li?biliti?? in tim? b???u?? of ?n unfavorable di?tributi?n of ?urr?nt ????t? in r?l?ti?n t? li?uidit?.On th? other hand, another bu?in??? with a ?urr?nt r?ti? of ?v?n less than 2 : 1 might n?t be ?x??ri?n?ing any difficulty in m?king the ???m?nt of ?urr?nt li?biliti?? in time b???u?? ?f its favourable distribution ?f current assets in r?l?ti?n t? li?uidit?.Diff?r?nt M??ning? A??ign?d to the Same T?rmDiff?r?nt firms, in ?rd?r to calculate r?ti? m?? assign different m??ning?. F?r ?x?m?l?, profit for the ?ur???? of calculating a r?ti? may be t?k?n ?? profit b?f?r? ?h?rging int?r??t ?nd tax or profit b?f?r? t?x but ?ft?r interest ?r profit ?ft?r tax ?nd interest.Thi? m?? affect th? ??l?ul?ti?n ?f ratio in diff?r?nt firm? ?nd such r?ti? wh?n u??d f?r ??m??ri??n may l??d t? wrong conclusions.Ignores Qu?lit?tiv? F??t?r?A???unting r?ti?? ?r? t??l? ?f ?u?ntit?tiv? ?n?l??i? ?nl?. But ??m?tim?? qualitative factors may ?urm?unt the quantitative aspects. Th? calculations d?riv?d fr?m th? ratio ?n?l??i? und?r such ?ir?um?t?n??? may get distorted.F?r ?x?m?l?, th?ugh ?r?dit m?? b? granted to a ?u?t?m?r ?n th? basis of information r?g?rding hi? fin?n?i?l position, ??t th? grant ?f ?r?dit ultim?t?l? d???nd? ?n d?bt?r’? ?h?r??t?r, h?n??t?, ???t r???rd and his managerial ?bilit?.No u?? if R?ti?? ?r? worked ?ut f?rm In?ignifi??nt ?nd Unr?l?t?d FiguresA???unting ratios m?? b? w?rk?d f?r ?n? tw? in?ignifi??nt ?nd unr?l?t?d figures as ratio of sales and inv??tm?nt in g?v?rnm?nt securities. Such ratios may b? misleading. Ratios should b? calculated ?n th? b??i? ?f ??u?? ?nd effect r?l?ti?n?hi?.One ?h?uld be ?l??r ?? t? wh?t ??u?? i? and wh?t ?ff??t i? b?f?r? ??l?ul?ting a r ?ti? b?tw??n two figures.