RATIO

ANALYSIS

Define the measurement

levels,
namely, liquidity, solvency,
stability,
and profitability
WHAT IS RATIO ANALYSIS?

Ratio analysis is a quantitative method of gaining insight into a

company's liquidity, operational efficiency, solvency, and profitability
by studying its financial statements such as the balance sheet and
income statement. INVESTOPEDIA
 TYPES OF FINANCIAL RATIO ANALYSIS

1. Liquidity Ratios – measure the ability of an entity to pay currently

maturing obligations and meet unexpected cash needs.
2. Solvency Ratios – measure the ability of an entity to survive over a long
period of time.
3. Profitability Ratios – measure the ability of an entity to earn income over a
period of time.
4. Operational Efficiency Ratios - measures the ability of the company to
utilize its assets.
LIQUIDITY
RATIOS
 LR – CURRENT RATIO

Current ratio is the relationship of available current assets to meet payments of current
liabilities. Also called working capital ratio. It is an important measure of financial
health since creditors can measure a company's ability to pay off its debts within a
year.
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
Dec. 31, 20X4 Dec. 31, 20X3
Total Current Assets P420,000 P460,000
Divided by Current Liabilities P160,000 P150,000
Equals the Current Ratio 2.63 3.07
INTERPRETATION

In 20X4, it indicates that Craft Company has available current assets of P2.63 for
every P1.00 of current liability. 2.63:1
In 20X3, there is P3.07 of current assets available to pay every P1.00 of current
liability. 3.07:1
• THERE IS A DECREASE IN CURRENT RATIO – CONSIDERED UNFAVORABLE
(CREDITORS)
• *HOWEVER, IF THE BUSINESS IS STILL ABLE TO PAY W/O FINANCIAL DIFFICULTY,
A DECREASE SHOULD NOT CAUSE ALARM.
 LR – ACID TEST RATIO/QUICK
RATIO
Acid test ratio is similar to Current ratio. However, it is stricter in its application because
it does not include inventories and prepaid items.
ACID TEST RATIO = QUICK ASSETS(Cash, Temp. Investments and Short term A/R)
TOTAL CURRENT LIABILITIES
Cable Co. Field Co.
Total QAssets P280,000 P600,000
Total Current LiabP300,000 P400,000
Acid-test Ratio .93:1 1.5:1
 INTERPRETATION

Cable Co. has available P.93 of quick assets to pay for every P1.00 of current
liabilities, whereas, Field Co. has 1.50 of quick assets for every P1.00 of current
liabilities.
*FIELD CO. IS IN A BETTER POSITION TO PAY ITS DEBTS ON THE DUE
DATE.

Note: There is no standard acceptable ratio. The acceptable ratio is determined by

the creditor or management or whoever is using the quick ratio as a tool for analysis.