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    Formulas in Business Finance

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    Praisen Joy
    The document discusses various types of financial ratios used to analyze a company's liquidity, leverage, profitability, and efficiency. It defines ratios including the current ratio, quick ratio, debt ratio, equity ratio, times interest earned ratio, gross profit margin, operating profit margin, net profit margin, accounts receivable turnover, average collection period, inventory turnover, average age of inventory, accounts payable turnover, average payment period, operating cycle, and cash conversion cycle. These ratios are computed using financial data from a company's balance sheet and income statement and are used to analyze its financial performance and health over time.

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    Formulas in Business Finance

    Uploaded by

    Praisen Joy
    12 views4 pages
    The document discusses various types of financial ratios used to analyze a company's liquidity, leverage, profitability, and efficiency. It defines ratios including the current ratio, quick ratio, debt ratio, equity ratio, times interest earned ratio, gross profit margin, operating profit margin, net profit margin, accounts receivable turnover, average collection period, inventory turnover, average age of inventory, accounts payable turnover, average payment period, operating cycle, and cash conversion cycle. These ratios are computed using financial data from a company's balance sheet and income statement and are used to analyze its financial performance and health over time.

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    formulas in business finance

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    The document discusses various types of financial ratios used to analyze a company's liquidity, leverage, profitability, and efficiency. It defines ratios including the current ratio, quick ratio, debt ratio, equity ratio, times interest earned ratio, gross profit margin, operating profit margin, net profit margin, accounts receivable turnover, average collection period, inventory turnover, average age of inventory, accounts payable turnover, average payment period, operating cycle, and cash conversion cycle. These ratios are computed using financial data from a company's balance sheet and income statement and are used to analyze its financial performance and health over time.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    12 views4 pages

    Formulas in Business Finance

    Uploaded by

    Praisen Joy
    The document discusses various types of financial ratios used to analyze a company's liquidity, leverage, profitability, and efficiency. It defines ratios including the current ratio, quick ratio, debt ratio, equity ratio, times interest earned ratio, gross profit margin, operating profit margin, net profit margin, accounts receivable turnover, average collection period, inventory turnover, average age of inventory, accounts payable turnover, average payment period, operating cycle, and cash conversion cycle. These ratios are computed using financial data from a company's balance sheet and income statement and are used to analyze its financial performance and health over time.

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    of 4

    Horizontal Analysis

    To compute:
    𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑜𝑜 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡 – 𝐵𝑎𝑠𝑒 (𝑒𝑎𝑟𝑙𝑒𝑒𝑒𝑟) 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡
    𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑜𝑜𝑜 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑜𝑜 𝑐ℎ𝑎𝑛𝑔𝑒/𝐵𝑎𝑠𝑒 (𝑒𝑎𝑟𝑙𝑒𝑒𝑒𝑟) 𝑦𝑒𝑎𝑟 𝑎𝑚𝑜𝑢𝑛𝑡

    I. Liquidity Ratios
    a. Types of Liquidity Ratios
    i. Current Ratio
    𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
    𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎ti𝑜 =
    𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿iabilities
    ii. Quick Ratio
    𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝑃𝑟𝑒𝑝𝑎id 𝑈𝑡i𝑙i𝑡i𝑒𝑠
    Q𝑢ic𝑘 𝑅𝑎𝑡io =
    𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿iabilities
    II. Leverage Ratios
    a. Types of Leverage Ratios
    i. Debt Ratio

    𝑇𝑜𝑡𝑎𝑙 𝐿iabilities
    𝐷𝑒𝑏𝑡 𝑅𝑎𝑡io =
    𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
    ii. Equity Ratio
    𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢i𝑡𝑦
    𝐸𝑞𝑢ity 𝑅𝑎𝑡io =
    𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
    iii. Times Interest Earned (TIE) Ratio
    𝑂𝑝𝑒𝑟𝑎𝑡in𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
    𝑇𝐼𝐸 𝑅𝑎𝑡i𝑜 =
    𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
    III. Profitability Ratios
    Types of Profitability Ratios
    i. Gross Profit Margin
    𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜fit
    𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜fit 𝑚𝑎𝑟𝑔in =
    𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
    ii. Operating Profit Margin
    𝑂𝑝𝑒𝑟𝑎𝑡in𝑔 𝑃𝑟𝑜fit
    𝑂𝑝𝑒𝑟𝑎ti𝑛𝑔 𝑃𝑟𝑜fit𝑡 𝑀𝑎𝑟gi𝑛 =
    𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
    iii. Net Profit Margin or Return on Sales
    𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
    𝑁𝑒𝑡 𝑃𝑟𝑜fit 𝑀𝑎𝑟gi𝑛 =
    𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
    IV. Efficiency Ratios
    i. Accounts receivable turnover
    𝑆𝑎𝑙𝑒𝑠
    𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐ei𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
    𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒iv𝑎𝑏𝑙𝑒
    ii. Average collection period

    365
    𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑙𝑙𝑒𝑐𝑡i𝑜𝑛 𝑝𝑒𝑟io𝑑 =
    𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒iv𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
    iii. Inventory turnover
    𝐶𝑜𝑠𝑡 𝑜f 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
    𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
    𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
    iv. Average age of inventory
    365
    𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑒 𝑜f in𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
    𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
    v. Accounts Payable turnover
    𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
    𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
    𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
    vi. Average payment period

    365
    𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟i𝑜𝑑 =
    𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

    vii. Operating cycle


    𝑂𝑝𝑒𝑟𝑎𝑡in𝑔 𝑐𝑦𝑐𝑙𝑒 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑙𝑙𝑒𝑐𝑡io𝑛 𝑝𝑒𝑟io𝑑 + 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑒 𝑜f in𝑣𝑒𝑛𝑡𝑜𝑟𝑦
    viii. Cash conversion cycle
    𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠i𝑜𝑛 𝑐𝑦𝑐𝑙𝑒
    = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑙𝑙𝑒𝑐𝑡io𝑛 𝑝𝑒𝑟i𝑜𝑑 + 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑒 𝑜f i𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
    − 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑒 𝑜f 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
    𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠i𝑜𝑛 𝑐𝑦𝑐𝑙𝑒 = 𝑜𝑝𝑒𝑟𝑎𝑡i𝑛𝑔 𝑐𝑦𝑐𝑙𝑒 − 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑔𝑒 𝑜f 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

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