Om Namah Shivaya

CA MONK’S

Reading Material for Ratio Analysis

By CA Shivam Palan (IIMI)

Reading Material for CA Monk Financial Modeling Class

Website: - www.camonk.com
 Ratio Analysis || CA Monk

What is ratio analysis and why it is important?

Answer: Ratio analysis is a financial tool that uses ratios to evaluate a company's financial
performance. It helps identify strengths and weaknesses, assess the ability to meet financial
obligations, and compare performance with competitors. It is important because it provides
stakeholders with valuable insights into a company's financial health, helping them make informed
decisions.

Before we do the ratio analysis, we need to understand in detail about the company and various
trends of the company.
Hence to understand that we will do Vertical, Horizontal & Trend Analysis.

1. Company Trend
A. Vertical Analysis
Vertical analysis is a ratio analysis that compares each item in a company's financial statements to a
base figure, such as total sales or total assets, to determine the proportion of that item in relation
to the base figure. The results of this analysis are expressed as a percentage.
For example, in a vertical analysis of an income statement, each line item, such as revenue, cost of
goods sold, and operating expenses, is expressed as a percentage of total sales. This allows analysts
to identify trends and changes in the relative proportion of different items over time, and compare the
financial performance of different companies.
Vertical analysis is useful for identifying significant changes in a company's financial statements and
assessing the impact of those changes on the company's overall financial performance. It can also
help identify areas of a company's operations that may require attention or improvement.
The formula for Vertical Analysis:
Income statement formula = (Income statement Item/ Total Sales) *100
Balance sheet = (Balance Sheet Item/Total Asset(Liability))*100

B. Horizontal Analysis
Horizontal analysis, also known as trend analysis, is a financial analysis technique that compares
financial data or performance over a period of time. It involves analyzing and comparing financial
statements, such as income statements or balance sheets, from consecutive periods to identify trends,
changes, and patterns.
The purpose of horizontal analysis is to assess the changes in financial data over time and gain
insights into a company's performance, growth, and financial stability. It helps in identifying areas of
improvement, potential risks, and evaluating the effectiveness of financial management strategies.
Formula and Calculation:
Horizontal analysis is typically performed by calculating the percentage change in financial figures
between two periods. The formula for calculating the percentage change is as follows:

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Percentage Change = (Current Year Figure - Previous Year Figure) / Previous Year Figure * 100

C. Trend Analysis
Trend analysis is a statistical technique used to analyze and identify patterns or trends in data over a specific
period of time. It involves examining historical data points to understand the direction and magnitude of
change in a variable of interest, such as sales, revenue, or market trends.
Multiple Types of trends are being identified:

 Upward Trend: This suggests growth, improvement, or increasing values in the variable being
analyzed.
 Downward Trend: This suggests decline, deterioration, or decreasing values in the variable
being analyzed.
 Flat or Stable Trend: This suggests stability, consistency, or no significant change in the
variable being analyzed.

2. Liquidity Ratio
Liquidity ratios are financial ratios that assess a company's ability to meet its short-term obligations
and measure its overall liquidity or cash position. These ratios provide insights into a company's
ability to generate cash, manage its current liabilities, and cover immediate financial needs.

A. Current Ratio
The current Ratio is a financial ratio that measures the ability of a company to meet its short-term
obligations by comparing its current assets to its current liabilities. It provides insights into the
company's liquidity position and its capacity to cover its immediate payment obligations.
Current Ratio = Current Assets / Current Liabilities
This suggests that the company has a relatively healthy liquidity position and
Current Ratio >1is capable of meeting its short-term obligations. However, too high of a
current ratio also suggests that the company is leaving too much excess cash
unused, rather than investing the cash into projects for company growth.
Current Ratio =1 This suggests that the company's liquidity position is balanced, with
sufficient assets to cover its immediate payment obligations.
The company may not have enough liquid assets to cover its immediate
Current Raito < 1 payment obligations. It suggests a higher risk of defaulting on short-term
debts.
Disadvantages of the Current Ratio:
 Timing of Liabilities: The current Ratio treats all current liabilities as due immediately, even if
they have longer payment terms. This can lead to misleading interpretations, particularly when
considering accounts payable and other short-term obligations.
 It does not consider the quality of assets: e.g.

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Company A Company B
Cash 500 Cash 0
Accounts Receivable 0 Accounts Receivable 0
Inventory 0 Inventory 500
Prepaid 0 Prepaid 0
Total of CA 500 Total of CA 500
Current Liability 350 Current Liability 350
Current Ratio 1.43 Current Ratio 1.43
Looking at the above details, we can see that Company B has a longer cash cycle than Company
A.
 Manipulation of current assets & current liability can be easily done.
What will happen if CA or CL increases or decrease with the same amount?
e.g. CA = 500 CL= 350
Current Ratio = 1.43
If we Increase CA & CL by Rs. 100.
CA= 600 CL = 450
Current Ratio = 1.33

B. Quick Ratio or Acid Test Ratio

It is a financial ratio that measures a company's ability to meet its short-term obligations using its
most liquid assets. It provides insights into a company's immediate liquidity position, excluding
inventory and other less liquid assets.
Quick Ratio = (Cash + Cash Equivalents + Short-Term Investments + Accounts Receivable) /
Current Liabilities
Or
Quick assets = Current Assets – Inventory – Prepaid expenses
While a quick ratio of 1 or higher is generally considered healthy, it's important to consider industry
norms, historical trends, and company-specific factors when interpreting the quick ratio.

C. Cash Ratio
The Cash Ratio is a financial ratio that measures a company's ability to cover its short-term obligations
using only its cash and cash equivalents. It provides insights into the company's immediate liquidity
position and its ability to pay off its current liabilities without relying on other assets.
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
Creditors prefer a higher crash ratio as it indicates the company can easily pay off its debt. There is
no ideal figure but a ratio between 0.5 to 1 is usually preferred. As with the current and quick ratios,
too high of a cash ratio indicates that the company is holding onto too much cash instead of utilizing
its excess cash to invest in generating returns or growth.

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 Ratio Analysis || CA Monk

3. Turnover Ratio
A. Accounts Receivable Turnover Ratio: [Higher the Better]
The accounts receivable turnover ratio, sometimes known as the debtor’s turnover ratio, measures
the number of times over a specific period that a company collects its average accounts receivable.
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Net Credit Sales: It represents the total credit sales during a specific period, excluding any cash sales.
Average Accounts Receivable: It is the average of the beginning and ending accounts receivable balances
during the same period.

 Higher Ratio: A higher Accounts Receivable Turnover Ratio indicates that the company is
collecting its receivables quickly, which is generally a positive sign. It suggests efficient credit
and collection management and good liquidity.
 Lower Ratio: A lower ratio may indicate a longer collection period or potential issues with credit
policies or customer payments. It could suggest poor liquidity or difficulties in collecting
outstanding amounts.

Accounts Receivable Days:

Accounts receivable days are the number of days on average that it takes a company to collect on
credit sales from its customers.
Accounts Receivable days= 365/Accounts Receivable Turnover Ratio
Interpretation: It takes the company X days on average to collect its accounts receivables.
*Check the Industry Ratio and then decide whether the company needs improvement or not.

B. Fixed Asset Turnover Ratio: [Higher the Better]

It assesses how effectively a company utilizes its assets to generate sales.
Asset Turnover Ratio = Net Sales / Average Total Asset
 Higher Ratio: A higher Asset Turnover Ratio indicates that the company generates more sales
revenue relative to its asset base. It suggests efficient asset utilization and effective revenue
generation.
 Lower Ratio: A lower ratio may indicate the underutilization of assets, inefficient operations, or
challenges in generating sales from the asset base.

Join Financial Modeling Master Class for a better understanding of all the
concepts in detail; click on the below link and register for the course:
https://www.camonk.com/courses/fmva-package

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 Ratio Analysis || CA Monk

C. Inventory Turnover Ratio

The inventory turnover ratio measures how many times a business sells and replaces its stock of
goods in a given period of time.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
 Higher Ratio: A higher Inventory Turnover Ratio indicates that the company is selling its
inventory quickly and efficiently. It suggests effective inventory management, strong demand
for products, and lower carrying costs.
 Lower Ratio: A lower ratio may indicate slower inventory turnover, excess inventory levels,
obsolete or slow-moving inventory, or challenges in managing inventory efficiently.
Inventory Turnover Days [Lower the Better]
Inventory Turnover Days are the number of days on average it takes to sell a stock of inventory.
Inventory Turnover Days = 365 / Inventory Turnover Ratio
It takes the company X days on average to sell an entire stock of inventory.
Lower Days: A lower Inventory Turnover Days indicates that inventory is sold quickly, leading to a
shorter cash-to-cash cycle and efficient inventory management.
(Beginning Inventory + Addition in Inventory) = (Cost of goods sold + Ending Inventory)

D. Accounts Payable Turnover Ratio

Accounts Payable Turnover Ratio is a financial metric that measures how efficiently a company
manages its accounts payable by paying its suppliers and vendors. It assesses the frequency with
which a company pays off its creditors during a specific period.
 Higher Ratio: A higher Accounts Payable Turnover Ratio indicates that the company pays off
its creditors more frequently. It suggests efficient management of trade credit, strong vendor
relationships, and effective working capital management.
 Lower Ratio: A lower ratio may indicate longer payment cycles, delays in paying off suppliers,
or challenges in managing accounts payable efficiently.
Accounts Payable Turnover Ratio = Total Purchases / Average Accounts Payable
Payable Days
Payable Days = 365/ Accounts Payable Turnover
Lower Days: A lower Days Payable Outstanding indicates that the company pays its suppliers and
vendors more quickly, which can be a sign of strong cash flow management or favorable payment
terms negotiated with creditors.
*Days Payable Outstanding should consider industry benchmarks, historical data, and the
company's specific circumstances.

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Cash Conversion Cycle

The Cash Conversion Cycle (CCC) is a financial metric that measures the time it takes for a company to
convert its investments in inventory into cash flows from sales. It provides insights into the efficiency of
managing working capital and cash flow.
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

 Positive Cycle: A positive Cash Conversion Cycle indicates that a company's operating cycle
is longer than its payables cycle. It means that the company needs to finance its working
capital requirements before receiving cash inflows. It may suggest a need for additional
funding or working capital management improvements.
 Negative Cycle: A negative Cash Conversion Cycle implies that a company's payables cycle
is longer than its operating cycle. It means that the company can use suppliers' credit to
finance its working capital needs, resulting in improved cash flow and liquidity.

4. Leverage Ratio
Leverage ratio refers to a financial metric that assesses the level of debt a company uses to finance its
operations and investments. The leverage ratio evaluates the extent to which a company relies on
borrowed funds compared to its equity.

A. Debt to Equity Ratio

Debt to Equity Ratio = Total Debt / Total Equity
Total Debt: It represents the sum of a company's short-term and long-term debt obligations.
Total Equity: It includes the company's shareholders' equity or net worth, which represents the residual
interest in the company's assets after deducting liabilities.

B. Debt Ratio: [Lower the Better]

Debt Ratio = Total Debt / Total Assets

The debt ratio compares a company's total debt to its total assets. It shows the percentage of assets financed
by debt. A higher debt ratio implies a higher financial risk, as it indicates a larger portion of the company's
assets is funded by debt.

 Higher Ratio: A higher debt ratio suggests a higher level of financial risk. It indicates that a larger
proportion of the company's assets is financed by debt, which can increase interest expenses and the
company's vulnerability to changes in interest rates or economic conditions. High levels of debt can
also limit a company's ability to invest in growth opportunities or cope with unexpected financial
challenges.
 Lower Ratio: A lower debt ratio may indicate that the company has a strong capital structure with a
significant portion of its assets funded by equity. This can imply that the company is less reliant on
debt to finance its operations and is better positioned to handle financial downturns or economic
uncertainties.

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C. Equity Ratio: [Higher the Better]

Equity Ratio = Shareholders' Equity / Total Assets
The equity ratio is the complement of the debt ratio. It represents the proportion of a company's assets
financed by equity. A higher equity ratio suggests a lower level of financial risk, as it indicates a larger
portion of the company's assets is funded by shareholders' equity.

 Higher Ratio: A higher equity ratio indicates that the company has a greater cushion of ownership funds
to cover its obligations and potential financial downturns. It suggests that the company has a more solid
financial position and may be better equipped to handle unexpected challenges or fluctuations in the
business environment.
 Lower Ratio: A lower equity ratio suggests a higher level of financial risk. A lower equity ratio means
that a larger proportion of the company's assets is financed by debt. This can increase the company's
vulnerability to changes in interest rates, economic conditions, or other financial challenges.

D. Debt to EBITDA Ratio: [Lower the Better]

Debt to EBITDA Ratio = Total Debt / EBITDA
This ratio compares a company's total debt to its earnings before interest, taxes, depreciation, and
amortization (EBITDA). It measures how many years it would take for a company to repay its debt using
its EBITDA. A higher ratio indicates higher financial risk, as it suggests the company has a larger debt
burden relative to its earnings.

 Higher Ratio: A higher Debt to EBITDA ratio indicates a higher level of financial risk. A higher ratio
suggests that the company has a larger debt burden relative to its earnings. This may indicate that a
significant portion of the company's earnings is being used to service its debt, leaving less cash flow
available for other purposes such as reinvestment or growth.
 Lower Ratio: A lower Debt to EBITDA ratio indicates that the company has more earnings available
to cover its interest expenses and debt repayments. It suggests a stronger financial position, greater
flexibility in allocating cash flow, and reduced vulnerability to economic downturns or unexpected
financial challenges.

E. Interest Coverage Ratio: [Higher the Better]

Interest Coverage Ratio = EBIT (Earnings Before Interest and Taxes) / Interest Expenses

The interest coverage ratio assesses a company's ability to cover its interest expenses with its earnings. It
is calculated by dividing the company's EBITDA or operating income by its interest expenses. A higher
ratio indicates a better ability to meet interest obligations and lower financial risk.

 Higher Ratio: A higher interest coverage ratio signifies that a company has a greater cushion or
margin of safety to handle its interest payments. It indicates that the company has a healthier
financial position, better cash flow generation, and reduced vulnerability to financial distress. A
higher ratio also implies a lower risk of defaulting on debt payments.
 Lower Ratio: A lower interest coverage ratio suggests a higher risk of being unable to meet interest
obligations. A ratio below 1 indicates that a company's earnings are not sufficient to cover its
interest expenses. This raises concerns about the company's ability to service its debt and may
indicate a higher level of financial risk

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5. Profitability Ratio
Profitability ratios are financial metrics used to evaluate a company's ability to generate profits
from its operations. These ratios provide insights into the company's profitability and efficiency
in utilizing its resources.

A. Gross Profit Margin: [Higher the Better]

Gross Profit Margin = (Gross Profit / Revenue) x 100
Gross profit margin is a financial ratio that measures the profitability of a company's core
operations by assessing the percentage of revenue left after deducting the direct costs
associated with producing or delivering goods or services. It represents the portion of sales
revenue that remains as gross profit.
 Higher Margin: A higher gross profit margin is generally preferred, as it suggests that a
company has effective cost management and is generating a higher proportion of revenue
as gross profit. It implies that the company has a higher potential to cover operating
expenses, reinvest in the business, or distribute profits to shareholders.
 Lower Margin: A low gross profit margin indicates that a company is generating a
relatively smaller proportion of revenue as gross profit after accounting for the direct costs
associated with producing goods or delivering services.

B. Net Profit Margin: [Higher the Better]

Net Profit Margin = (Net Profit / Revenue) x 100

Net profit margin is a financial ratio that measures the profitability of a company by
evaluating the percentage of revenue that remains as net profit after accounting for all
expenses, including operating expenses, interest, taxes, and other non-operating costs.
 Higher Margin: A higher net profit margin is generally preferred, as it suggests that
a company is generating a larger percentage of revenue as net profit. It indicates
efficient cost management, effective revenue generation, and a higher potential to
cover operating expenses, taxes, interest payments, and provide returns to
shareholders.
 Lower Margin: A low net profit margin may indicate several factors, including high
expenses, pricing pressure, low pricing power, or inefficiencies in the company's
operations.

Join Financial Modeling Master Class for a better understanding of all the
concepts in detail; click on the below link and register for the course:
https://www.camonk.com/courses/fmva-package

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 Ratio Analysis || CA Monk

C. Return on Assets (ROA): [Higher the Better]

ROA = Net Income / Average Total Assets

Return on Assets (ROA) is a financial ratio that measures a company's profitability in relation to its
total assets. It indicates how effectively a company utilizes its assets to generate profits.
 Higher Return: A higher ROA indicates that a company is generating a higher level of profit
relative to its total assets. This suggests that the company is effectively utilizing its assets to
generate profits and is more efficient in its operations.
 Lower Return: A lower ROA generally indicates lower profitability and efficiency in utilizing
assets to generate profits. It suggests that the company is generating relatively less profit in
relation to its total assets.

D. Return on Equity: [Higher the Better]

ROE measures a company's profitability by calculating the return generated on the shareholders'
equity. It evaluates how efficiently a company generates profits from the capital invested by its
shareholders.
ROE = (Net Income / Average Shareholders' Equity) x 100

A higher ROE suggests that the company is effectively employing its resources, managing its assets,
and generating higher returns for its shareholders. It reflects strong profitability and is often seen as
a positive indicator of a company's financial performance.

E. Earnings per Share (EPS): [Higher the Better]

EPS = Earnings attributable to Equity Shareholders / Average Outstanding Shares
Return on Assets (ROA) is a financial ratio that measures a company's profitability in relation to its
total assets. It indicates how effectively a company utilizes its assets to generate profits.

 Higher EPS: A higher EPS indicates that a company is generating more earnings per
outstanding share of common stock.
 Lower EPS: A lower EPS indicates that a company is generating lower earnings per
outstanding share of common stock.

6. Market Ratio:

A. Price-to-Earnings-Ratio: [Higher the Better]

P/E ratio = Market Price per Share / Earnings per Share (EPS)
The P/E ratio, or Price-to-Earnings ratio, is a financial metric used to evaluate the relative value of a
company's stock. It compares the market price per share to the earnings per share (EPS) generated
by the company.

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 Higher Ratio: A higher P/E ratio suggests that investors have higher expectations for future earnings
growth, and they are willing to pay a premium for the stock. It could indicate that the stock is relatively
expensive compared to its earnings potential.
 Lower Ratio: A lower P/E ratio may indicate that the stock is undervalued or that investors have lower
expectations for future earnings growth. It could suggest that the stock is relatively cheaper compared to
its earnings potential.

Here's an overview of the P/E ratio and its role in financial Modeling:

 Calculation: The P/E ratio is calculated by dividing the market price per share of a company's stock by
its earnings per share (EPS). The formula is as follows: P/E ratio = Market Price per Share /
Earnings per Share
 Interpretation: The P/E ratio indicates the market's perception of the company's earnings and growth
prospects. A higher P/E ratio suggests that investors are willing to pay a premium for the company's
earnings, indicating higher growth expectations. Conversely, a lower P/E ratio suggests lower growth
expectations or undervaluation.
 Valuation: In financial Modeling, the P/E ratio can be used to estimate the value of a company's stock.
By applying a P/E ratio to the projected future earnings per share, analysts can estimate the intrinsic
value of the stock. This helps in determining whether a stock is overvalued or undervalued.
 Comparisons: The P/E ratio is most useful when comparing it to other companies in the same industry
or the overall market. It provides a relative valuation metric, allowing for comparisons between
companies of different sizes or growth rates. By comparing a company's P/E ratio to its peers, analysts
can assess its valuation relative to industry norms.
 Growth and Risk: The P/E ratio takes into account the company's earnings growth prospects and risk
profile. High-growth companies often have higher P/E ratios as investors anticipate future earnings
growth. On the other hand, companies with lower growth prospects or higher risk may have lower P/E
ratios.
 Limitations: The P/E ratio has certain limitations. It does not consider other factors like debt, cash
flow, or the company's competitive position. Moreover, different industries may have different average
P/E ratios due to variations in growth rates, risk profiles, or capital intensity.
 Sensitivity Analysis: Financial models often include sensitivity analysis of the P/E ratio to assess the
impact of changes in earnings, market conditions, or growth assumptions. This helps in understanding
the sensitivity of the stock's value to different factors and scenarios.

B. Price-to-Sales-Ratio: [Higher the Better]

P/S ratio = Market Price per Share / Revenue per Share
The Price-to-Sales ratio (P/S ratio) is a financial metric used to evaluate the valuation of a company's stock
relative to its revenue or sales. It compares the market price per share to the company's revenue per share.

 Higher Ratio: A higher P/S ratio generally indicates that investors are willing to pay a higher premium
for each dollar of revenue generated by the company. It suggests that the stock is relatively more
expensive compared to its revenue potential.

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 Lower Ratio: A lower P/S ratio may indicate that the stock is undervalued or that investors are less
optimistic about the company's revenue growth prospects. It suggests that the stock is relatively cheaper
compared to its revenue potential.

Join Financial Modeling Master Class for a better understanding of all the
concepts in detail; click on the below link and register for the course:
https://www.camonk.com/courses/fmva-package

C. Price-to-Book-Ratio: [Higher the Better]

P/B ratio = Market Price per Share / Revenue per Share
The Price-to-Book ratio (P/B ratio) is a financial metric used to assess the valuation of a company's
stock in relation to its book value. It compares the market price per share to the book value per
share.

 Higher Ratio: A higher P/B ratio suggests that investors are willing to pay a higher premium for each
dollar of book value owned by the company. It could indicate that the stock is relatively expensive
compared to its book value.
 Lower Ratio: A lower P/B ratio may indicate that the stock is undervalued or that investors are less
optimistic about the company's book value. It suggests that the stock is relatively cheaper compared to
its book value.

D. Dividend Yield:

Dividend Yield = (Annual Dividend per Share / Stock Price) * 100

Dividend yield is a financial ratio that measures the annual dividend payment of a company relative to its
stock price. It indicates the percentage return on investment that an investor can expect to receive from
dividends alone.

 Higher Yield: A higher dividend yield indicates a higher return on investment from dividends, making
it more attractive for income-seeking investors.
 Lower Yield: A lower dividend yield is a relatively low percentage of return on investment from
dividends compared to the stock price. It means that the company is paying a smaller dividend in
relation to its stock price.

7. Book Value Par Share:

It represents the value of a company's equity divided by the number of outstanding shares.
Book Value per Share = Shareholders' Equity / Number of Outstanding Shares
When will company use book value per share for valuation of company:

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1. Valuing Asset-Intensive Companies: Companies that primarily hold tangible assets, such as
manufacturing or real estate companies, may use the book value method. In such cases, the
book value of assets, such as property, plant, and equipment, can be a meaningful indicator of
the company's value.
2. Valuing Distressed Companies: When a company is facing financial distress or is on the
verge of bankruptcy, the book value method may be relevant. In these situations, the market
value of the company's assets may be lower than their book value due to unfavorable market
conditions or financial difficulties.
3. Valuing Holding Companies: Holding companies often hold investments in other companies.
In such cases, the book value of these investments, combined with other assets and liabilities,
can provide a basis for valuation.
4. Valuing Non-profit Organizations: Non-profit organizations may rely on the book value
method as their primary objective is not profit generation. The focus is on managing and
preserving the organization's assets and maintaining financial sustainability.
5. Valuing Companies with Stable and Predictable Earnings: In some cases, companies with
stable and predictable earnings may use the book value method as a conservative approach to
valuation. This is particularly relevant when the market value exceeds the book value due to
factors such as goodwill or intangible assets.

8. Return on capital employed (ROCE)

ROCE is a financial ratio that measures the profitability and efficiency of a company's capital
investments, specifically the return generated from all the capital employed in the business,
including both equity and debt.
ROCE = (Operating Profit / Capital Employed) x 100
Operating Profit represents the earnings before interest and taxes (EBIT), and Capital Employed
includes both equity and debt, such as shareholders' equity, long-term debt, and other long-term
liabilities.

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Summary of Ratio
Heading Type of Ratio Formula
Income Statement =
Vertical Analysis (Income statement Item/ Total Sales) *100
Balance sheet = (Balance Sheet Item/Total
Asset(Liability))*100
1. Company Trend Percentage Change =
Horizontal Analysis (Current Year Figure - Previous Year Figure) /
Previous Year Figure * 100
Trend Analysis It identifies patterns or trends in data over a
specific period of time
Current Ratio Current Ratio = Current Assets / Current
Liabilities
Quick Ratio or Acid Quick Ratio= (Cash + Cash Equivalents +
2. Liquidity Ratio Test Ratio Short-Term Investments + Accounts
Receivable) / Current Liabilities
Cash Ratio Cash Ratio = (Cash + Cash Equivalents) /
Current Liabilities
Accounts Receivable Accounts Receivable Turnover Ratio = Net
Turnover Ratio Credit Sales / Average Accounts Receivable
Asset Turnover Ratio Asset Turnover Ratio=
3. Turnover Ratio Net Sales / Average Total Asset
Inventory Turnover Inventory Turnover Ratio = Cost of Goods
Ratio Sold / Average Inventory
Accounts Payable Accounts Payable Turnover Ratio = Total
Turnover Ratio Purchases / Average Accounts Payable
Accounts Receivable Accounts Receivable days= 365/Accounts
Days Receivable Turnover Ratio
Inventory Turnover Inventory Turnover Days =
4. Turnover Days Days 365 / Inventory Turnover Ratio
Payable Days Payable Days = 365/ Accounts Payable
Turnover
Debt to Equity Ratio Debt to Equity Ratio =
Total Debt / Total Equity
Debt Ratio Debt Ratio =
Total Debt / Total Assets
5. Leverage Ratio Equity Ratio Equity Ratio =
Shareholders' Equity / Total Assets
Interest Coverage Interest Coverage Ratio =
Ratio EBIT (Earnings Before Interest and Taxes) / Interest
Expenses
Gross Profit Margin
Gross Profit Margin =
(Gross Profit / Revenue) x 100
Net Profit Margin Net Profit Margin =
Net Profit Margin = (Net Profit / Revenue) x 100
Return on Assets Return on Assets (ROA) =
6. Profitability Ratio (ROA) ROA = Net Income / Average Total Assets
Return on Equity ROE = (Net Income / Average Shareholders'
(ROE) Equity) x 100

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Earnings per Share Earnings per Share (EPS) =

(EPS) Earnings attributable to Equity Shareholders /
Average Outstanding Shares
Price-to-Earnings Price-to-Earnings Ratio (P/E Ratio)=
Ratio (P/E Ratio) Market Price per Share / Earnings per Share
(EPS)

7. Market Ratio Price-to-Sales Ratio Price-to-Sales Ratio (P/S ratio) =

(P/S Ratio) Market Price per Share / Revenue per Share
Price-to-Book Ratio Price-to-Book Ratio (P/B Ratio) =
(P/B Ratio) Market Price per Share / Revenue per Share
Dividend Yield Dividend Yield =
(Annual Dividend per Share / Stock Price) * 100

Join Financial Modeling Master Class for a better understanding of all the
concepts in detail; click on the below link and register for the course:
https://www.camonk.com/courses/fmva-package

Financial Modeling & Valuation Class || By CA Shivam Palan 15