RATIO ANALYSIS

SUMMARY

1. Financial analysis is the use of financial statements to analyze a firm’s financial position and
its performance

2. To make financial information that is sources from financial statement be more useful,
financial ratios that restate the financial figures in relative terms are used to identify the
financial strengths and weaknesses of a firm.

3. Profitability ratio: To analyze whether the management of a firm is generating adequate

profits from the use of the firm’s capital and assets.

a. Profit Margin = Profit/ Net Sales

b. Assets Turnover = Sales / Average assets
c. Return on Assets (ROA) = Net income / Average assets
d. Return on ordinary shareholders equity (ROE) = Net Income/Shareholders Equity
e. Earning Per Share = Net income/Total ordinary share issued
f. Price Earning Ratio = Market Price of Ordinary Share/ Earnings per share
g. Payout Ratio = Dividend paid/net income

4. Leverage/Solvency Ratios: investigating how a firm being finances and provide indication
whether a firm is able to meet the interest payments.
a. Debt to Total Assets Ratio = Total Debts / Total Assets
b. Debt to Equity Ratio = Total Debts / Total Equity
c. Time Interest Earned Ratio = Income before tax and interest/Interest Expense
d. Cash- Debts Coverage Ratio = Net cash from operating activities / average liabilities

5. Liquidity ratios: to find out to what extent to which the firm has adequate cash flows or assets
that ear to cash that would be sufficient to meet the short-term liabilities of the firm.

a. Current Ratio = Current Assets / Current Liabilities

b. Quick Ratio = Current Assets - Inventories / Current Liabilities
c. Receivable Turnover Ratio = Credit sales / Average Net Receivables
d. Receivable Turnover Days = 365 days / Receivable Turnover Ratio
e. Inventory Turnover Ratio = COGS / Average Inventory
f. Inventory Turnover Days = 365 days / Inventory Turnover

SHAZA 1
USES & LIMITATIONS OF RATIO ANALYSIS
USES
1. Investors interested to know the
performance of companies (to calculate
returns and wealth)
2. Lenders to see the ability of the organization
to remit the debt burden and all financial
charges
3. LHDN (gov body) interested to compute the
actual tax liability of the company and to find
any leeway for manipulation
4. Researchers uses for academic purpose
5. Media will use for comparison and
publication
LIMITATIONS
1. Authenticity of Data: Data maybe
inaccurate due to manipulations
2. Valuation of Data: Data recorded is
historical data.
3. Non-uniformity in calculation: Different
companies use different calculation
methods.
4. Diversified operation: Most companies
produce products belonging to different
industries but only one statement is
prepared.
SHAZA 2