Ratio Analysis

Profitability Ratios: (%)

Net Income Prepared by
Profit margin = Sales
Anwar Zahid

Net Income
Return on Asset (ROA) = Total Assets

 ROA = ( Profit margin * Asset Turnover )

Net Income
Return on Equity (ROE) =
Stckholder s ' Equity

Return on Asset (ROA )

 ROE = (1−Debt / Asset)

Earnings per Share (EPS) =

Net Income availabe ¿ com . Stockholders ¿
Noof Commo n share Outstandings

Current Stock price per share

P / E ratio = EPS

Liquidity Ratios:
Current Asset
Current ratios = Current Liabolity

Current Asset−Inventory− Advance expense .

Quick ratio / Acid Test= Current Liabilities

Asset Utilization: ( Times )

Sale(On Credit )
Account Receivables Turnover: Account Receivable

Account Recievable
Average Collection Period = Average daily credit sales

Sales(On Credit )
 Average daily credit sales = 360

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 Salse
Inventory Turnover = Inventory

Sales
Fixed Asset Turnover = ¿ Assets

Sales
Total asset Turnover = Total Asset

Balance Sheet
For the year ending December 21, 2015

Asset (A) $ $ Liability (L) & Owners’ Equity $ $

Total (OE) Total

Cash 200 Account Payable 150

Inventory 500 Unpaid expense 150
Account receivable 100 Current Liability (CL) 300

 Current Asset (CA) 800 Long-term debt(LTD) 100

Equipment 200  Total liability / Debt (TD) 400

 Fixed Asset (FA) 200  Total Equity (TE) 600

Total Asset (TA) 1,000 Total liab (TD). & Equity 1,000

A = L + OE

Based on above table we can draw following equations -

* TA = CA + FA

FA = TA – CA

* TD/ TL = CL + LTD

LTD = TD - CL

TE = TA - TD

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Debt Utilization Ratio: (%)
Total Debt
Total Debt to Total Asset = Total Asset

Interest before Interest∧Tax

Times Interest Earned = Interest

Income before interest ∧tax+ Lease payment

Fixed Charge Coverage = Interest + Lease payment

Interpretations of major ratios:

ROA: Higher the ROA indicates the higher managerial performance to utilize the

asset for generating profit. However, lower the ROA indicates the ineffective use of

asset. Hence, ROA often referred to as ROI (Return on investment).

ROE: The return on equity ratio shows how much profit each dollar of common

stockholders' equity generates. This is an important measurement for potential investors

because they want to see how efficiently a company will use their money to generate

net income.

ROE is also indicator of how effective management is at using equity financing to

fund operations and grow the company.

EPS: Also called net income per share. In other words, this is the amount of

money each share of stock would receive if all of the profits were distributed to the

outstanding shares at the end of the year.

A larger company will have to split its earning amongst many more shares of

stock compared to a smaller company.

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P / E ratio: The price earnings ratio, often called the P/E ratio, the market value of a
stock relative to its earnings by comparing the market price per share by the earnings
per share. In other words, P/E shows what the market is willing to pay for a stock based
on its current earnings.

Investors often use this ratio to evaluate what a stock's fair market value should
be by predicting future earnings per share. Companies with higher future earnings are
usually expected to issue higher dividends or have appreciating stock in the future.

Total Asset Turnover: is an efficiency ratio that measures a company's ability to

generate sales from its assets. In other words, this ratio shows how efficiently a
company can use its assets to generate sales.

Higher ratio is always more favorable. Higher turnover ratios mean the company
is using its assets more efficiently. Lower ratios mean that the company isn't using its
assets efficiently and most likely have management or production problems.

Account Receivable Turnover: Measures how many times a business can turn its
accounts receivable into cash during a period. In other words measures it shows, how
many times a business can collect its average accounts receivable during the year.

Higher ratio would be more favorable. Higher ratios mean that companies are
collecting their receivables more frequently throughout the year.

Inventory Turnover: Ratio that shows how effectively inventory is managed by

comparing cost of goods sold with average inventory for a period.

How efficiently a company can control its merchandise, so it is important to have

a high turn. This shows the company does not overspend by buying too much inventory
and wastes resources by storing non-salable inventory. It also shows that the company
can effectively sell the inventory it buys.

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Debt to asset ratio:  Measures the amount of total assets that are financed by creditors
instead of investors. This is an important measurement because it shows how
leveraged the company by looking at how much of company’s resources are owned by
the shareholders in the form of equity and creditors in the form of debt.

Investors and creditors use this measurement to evaluate the overall risk of a
company. Companies with a higher figure are considered more risky to invest in and
loan to because they are more leveraged. This means that a company with a higher
measurement will have to pay out a greater percentage of its profits in principle and
interest payments.

Times Interest earned: Ratio that measures the proportionate amount of income that
can be used to cover interest expenses in the future.

The ratio indicates how many times a company could pay the interest with its
before tax income, so obviously the larger ratios are considered more favorable than
smaller ratios. Times interest earned ratio of 4 means this company's income is 4 times
higher than its interest expense for the year.

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