FINANCIAL

RATIOS
Prepared by: Ms. Carren Christy Baguio
 Objectives
• describe the different financial mix rations and their
purposes
• Evaluate the business using liquidity ratios;
• Evaluate the business using efficiency ratios;
• Evaluate the business using solvency/stability ratios;
• Evaluate the business using profitability ratios; and
• Discuss how qualitative factors can influence financial
ratio analysis.
 FINANCIAL RATIOS

• An idea in analyzing ratios is that there are several major financial ratios
obtainable from the firm’s financial statements that reveal the financial
health of the firm.
 Liquidity Ratio
• Provide insight of the firm’s capability to pay its current
obligations. It is the first item in the financial analysis that
creditors/suppliers look into ascertain whether they will grant
credits or not to the debtors.
• They measure the ability of the business firm to pay off short-
term obligations as they mature
• Shows the firm’s current assets to its current liabilities
• LIQUIDITY RATIONS ARE AS FOLLOWS:
1. Current Ratio
2. Quick or Acid Test Ratio
Liquidity Ratio
 CURRENT RATIO

• Is probably the most frequently used measure of liquidity. It is used to

measure the ability of the firm to meet its current liabilities as paid by its
current assets.
• CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
• A current ration more than 1 is an indication that the firm is liquid and in a
good position to meet its currently maturing obligations.
 Quick Ratio

• It has a more stringent test of liquidity than current ratio

• Quick ratio EXCLUDES current assets other than cash, marketable
securities, and accounts receivable.
• Meant to reflect firm’s ability to pay its SHORT – TERM obligations except is
uses the most liquid current assets as the numerator.
• The HIGHER the quick ratio, the more liquid the firm is.
• QUICK RATIO = CASH + MARKETABLE SECURITIES + ACCOUNTS
RECEIVABLE / CURRENT LIABILITIES
 Receivable Turnover

• Measures the velocity of conversion of trade receivables into cash during

the year.
• Answers the question: How many times during the year has a receivable
been converted to cash?
• Considered an asset management ratio since it measures the effectiveness
of management handlings its resources
• Measures efficiency of the collection effort and credit policy of the business.
 Solvency Ratios

• Known as stability ratios, a group of financial ratios that measure the ability
of a business to settle its financial obligations when they mature and remain
stable.
• A business with a favorable solvency ratio appears to have most of the funds
provided by the owners instead of the creditors.
 Solvency Ratios

• Financial Leverage ratios: Operating leverage, financial leverage

• Operation Leverage – affects short-term investment and non-current
assets of an entity. Concerned about how fixed costs influenced the
operations of the company.
• Financial Leverage – affects the right-hand of the statement of financial
position. Concerned with short-term debt, long-term debt, and owner’s
equity. It reflects the number of debts utilized in the capital structure of
the business.
 Profitability Ratios
• A group of ratios that reflect the combined effects of liquidity and
management efficiency in handling the assets and liabilities relative to the
operations of the business
• The measures of profitability are as follows:
• Gross profit margin
• Operating profit margin
• Net profit margin
• Return on investments