Business Finance

2.3 : Summary on Financial Ratios

Lecture Notes

University of Santo Tomas- Senior High School

March 10, 2018

Lecture Notes 2.3: Summary on Financial Ratios

 Company Name
Statement of Profit/Loss
For the Time Period Ending Date
Revenue
(Cost of goods sold)
__________________________
Gross Profit
(Operating Expenses)
__________________________
Operating Income
Other income
(Other expenses)
Investment Income
(Interest Expense)
__________________________
Net Income before Taxes
(Taxes)
__________________________
Net Income

Lecture Notes 2.3: Summary on Financial Ratios

 Company Name
Statement of Financial Position
For the Time Period Ending Date

ASSETS LIABILITIES
Cash Notes payable
Net accounts receivable Accounts payable
Inventories Accrued expenses
_____________________ Current portion of L.T. debt
Total current assets _____________________
Gross fixed assets Total current liabilities
(Less Accumulated depreciation) Long-term debt
Net fixed assets _____________________
_____________________ Total liabilities
Total assets Preferred stock
Common stock
Retained earnings
_____________________
Total liabilities and equity
Lecture Notes 2.3: Summary on Financial Ratios
Financial Ratios

Liquidity Ratio
− company’s ability to meet
short-term obligations

Lecture Notes 2.3: Summary on Financial Ratios

Financial Ratios

Liquidity Ratio Profitability Ratio

− company’s ability to meet − company’s ability to generate
short-term obligations revenue

Lecture Notes 2.3: Summary on Financial Ratios

Financial Ratios

Liquidity Ratio Profitability Ratio

− company’s ability to meet − company’s ability to generate
short-term obligations revenue
Leverage Ratio
− company’s use of debt

Lecture Notes 2.3: Summary on Financial Ratios

Financial Ratios

Liquidity Ratio Profitability Ratio

− company’s ability to meet
short-term obligations
Leverage Ratio
− company’s use of debt
− company’s ability to generate
revenue
Efficiency Ratio
− company’s ability to be
efficient in its operations

Lecture Notes 2.3: Summary on Financial Ratios

Financial Ratios

Liquidity Ratio
• Current ratio
• Quick ratio

Lecture Notes 2.3: Summary on Financial Ratios

Financial Ratios

Liquidity Ratio Profitability Ratio

• Current ratio • ROE ratio
• Quick ratio • ROA ratio
• Gross profit margin ratio
• Operating profit margin
ratio
• Net profit margin ratio

Lecture Notes 2.3: Summary on Financial Ratios

Leverage Ratio
• Debt ratio
• Debt-to-equity ratio
• Interest coverage ratio

Lecture Notes 2.3: Summary on Financial Ratios

Leverage Ratio
• Debt ratio
• Debt-to-equity ratio
• Interest coverage ratio
Efficiency Ratio
• Accounts receivable turnover
ratio
• Average collection period
• Inventories turnover ratio
• Average age of inventories
• Accounts payable turnover
ratio
• Average payment period
• Total asset turnover
• Operating cycle
• Cash conversion cycle

Lecture Notes 2.3: Summary on Financial Ratios

Liquidity Ratios
1 Current Assets
Current Ratio = Current Liabilities
2 Quick Ratio = Current Assets − Inventories
Current Liabilities

Lecture Notes 2.3: Summary on Financial Ratios

Liquidity Ratios
1 Current Assets
Current Ratio = Current Liabilities
2 Quick Ratio = Current Assets − Inventories
Current Liabilities

Leverage Ratios
1 Debt Ratio = Total Liabilities
Total Assets
2 Debt-to-Equity Ratio = Total Liabilities
Total Equity
3 EBIT
Interest Coverage Ratio = Interest Expense
where EBIT is Earnings before interest and taxes

Lecture Notes 2.3: Summary on Financial Ratios

Profitability Ratios
1 Net Income
Return on Equity = Stockholders’ Equity

2 Return on Assets = Operating Income

Total Assets
(ROA= Net Income
Total Assets )

3 Gross Profit Margin = Gross Profit

Sales
where Gross Profit = Sales − Cost of Goods

4 Operating Profit Margin = Operating Income

Sales

5 Net Profit Margin = NetSales

Income

Lecture Notes 2.3: Summary on Financial Ratios

Efficiency Ratios
1 Sales
Accounts Receivable Turnover = Account Receivable
365
2 Average Collection Period = Account Receivable Turnover
3 Inventory Turnover = Cost of Goods Sold
Inventory
365
4 Average Age of Inventory = Inventory Turnover
5 Accounts Payable Turnover = TradeCost of Sales
Accounts Payable
365
6 Average Payment Period = Accounts payable turnover
7 Sales
Total Asset Turnover = Total Assets
8 Operating Cycle = Ave col period + Ave age of inventory
9 Cash Conversion Cycle
= Operating Cycle − average age of payables
10 Average Total Assets
Total asset (beg) + Total asset (end)
= 2
Lecture Notes 2.3: Summary on Financial Ratios
Prepare a balance sheet for SAD Company for the year
ending December 31, 2012.

Accounts payable Php 175, 200
Accounts receivable Php 402, 000
Accrued expenses Php 140, 000
Accumulated depreciation Php 166, 200
Cash Php 52, 000
Common stock Php 460, 000
Gross fixed assets Php 527, 000
Inventories Php 836, 000
Long term debt Php 424, 612
Net fixed assets Php 360, 800
Notes payable Php 225, 000
Retained earnings Php 225, 988

Lecture Notes 2.3: Summary on Financial Ratios

Prepare an income statement for SAD Company for the
year ending December 31, 2012.

Cost of goods sold Php 3, 250, 000

Depreciation Php 20, 000
Interest expense Php 76, 000
Other expenses Php 430, 300
Sales Php 3, 850, 000
Taxes Php 29, 480

Lecture Notes 2.3: Summary on Financial Ratios

Lecture Notes 2.3: Summary on Financial Ratios
Lecture Notes 2.3: Summary on Financial Ratios
L. Gitman, M. Joehnk, R. Billingsley, S. Besley and E. Bringham. Business
Finance, (Contributors: A. Altarejos and E. V. Magbata), JO-ES
Publishing House (2017). Cengage Learning; ISBN: 9789716555097

A. Gamatero. Business Finance, (2017). DIWA Learning Systems INC.

https://www.brainyquote.com/topics/financial.

Lecture Notes 2.3: Summary on Financial Ratios

Quote:
“Good health is not something we can buy. However, it can be
an extremely valuable savings account”

- Anne Wilson Schaef

Lecture Notes 2.3: Summary on Financial Ratios