This document discusses various types of financial ratios used in analyzing companies. It describes ratios that measure liquidity, debt, profitability, activity/efficiency, and market performance. Liquidity ratios indicate a company's ability to pay short-term debts, debt ratios measure financial leverage, and profitability ratios evaluate how efficiently assets are converted into net income. Activity/efficiency ratios assess asset utilization and turnover. Market ratios reflect investor perceptions of growth potential. Limitations of ratio analysis include difficulties in industry comparisons and the risk of distortions from accounting differences or inflation.

1. ADM658 – CHAPTER 3: FINANCIAL ANALYSIS (RATIO)
Debt Ratio
Liquidity Ratio
Profitability Ratio
Activity/Efficiencey
Ratio
Market Ratio
Acid Test Ratio
Fiancial Ratio
Basic
Stock Turnover
Ratio
Debtors Turnover
Ratio
Others
Ratio
Creditors Turnover
Ratio
Earning Per Share
Leverage Ratio
Return On Capital
Employed
Interest Cover Ratio
Return On Assets
Return On Equity
Market-to-book
Ratio
Dupont Analysis

2. ADM658 – CHAPTER 3: FINANCIAL ANALYSIS (RATIO)
Current Ratio:Firm's ability to
meet its short-term obligation.
CR= CA/CL
Quick Ratio: more conservtive
than the CR - includes
inventory & assets.
QR= (CA-Inventory)/CL
Net Working Capital: Firm's
overall liqudity.
NWC= CA-CL
Inventory Turnover (IR):
Measures the liquidity of a
firm's inventory.
IR = COGS/Inventory
Activity/Efficiency Ratio
Average Collection Period:
Time needed to collect
account receivables.
ACP= Receivables/Average
Sales per day.
Measures of how
efficiently the firm
utilizes its assets.
Total Asset Turnover:
efficiency of the firm uses its
assets to generate sales.
TATO= Sales/Total Assets
Debt Ratios: ability to repay
long-term debt.
DR = Total Liability/Total
Asset
Debt to Equity Ratio (D/E):
The relative propotion of
equity anddebt used to
finance firm's asset.
D/E= (LT Debt + Value of
Leases)/Average
Shareholder's Equity.
Times Interest Earned Ratio
(TIE): Ability to make
contractual interest
payment.
TIE: Net Income/Annual
Interest Expenses.
Debt Service Coverage Ratio
(DSCR): ability to produce
enough cash to cover its debt include lease payment.
DSCR= Net Operating Income
/ Total Debt Service.
Liquidity Ratio
Basic Ratio 1.
Measures company’s
ability to pay off its
short-term obligation.
Debt Ratios
Measure the % of a
company’s assets are
provided via debt.

3. ADM658 – CHAPTER 3: FINANCIAL ANALYSIS (RATIO)
Gross Profit Margin (GPM): % of
each dollar remaning after the firm
has paid for its goods.
Basic Ratio 2.
OPM: Operating Profits/Sales
Net Profit Margin (NPM): % of
each dollar remaining after all
costs and expenses including
interest and taxes are deducted.
NPM: Net Income/Sales
ROA= Net Income/ Total Assets
Return in Equity(ROE): Return
earned on the owners' investment
in the firm.
Profitability Ratios
Operating Profit margin (OPM): %
of each dollar remaining after all
costs and expenses other than
interest and taxes deducted.
Return on Total Asset (ROA):
Firm's overal effectiveness in
generating profits with its
available assets.
Measures the firms used its
assets and control its expenses
to generate an acceptable rate
of return.
GPM: Gross Profits/Sales
ROE: Net Income/Shareholder's
Equity.
Earning per Share (EPS): profit
earned er unit of issued share
(ordinary)
Dividend per share (DPS): Amount
of dividend received by ordinary
shareholders for each unit of share
held.
Market Ratio
Measures investors
perception and judgment
towards the firm’s growth
potential
EPS: Net Income Available to
CS/No. of ordinary shares issued
DPS: Ordinary Dividend/No. of Or.
shares issued.
Dividend Payout Ratio (DPR):
proportion of earning that is
distributed as dividends to
shareholders
DPR: DPS/EPS
Price/Earning Ratio (P/E):
Investors confidence in the firms'
future prospects.
P/E: Market Price per share (MPS)
/ EPS
Dividend Yield (DY): Return
earned on shares.
DY: Latest annual dividends/MPS

4. ADM658 – CHAPTER 3: FINANCIAL ANALYSIS (RATIO)
Difficult to identify suitable industriy category to
classify a firm.
Limitation of Ratio.
Inflation can distort the financial statements
(particularly the balance sheet). Any problem in the
financials caused by inflation can be passed on to
ratios.
Ratio analysis is probably most accurate for
organizations with a narrow line of products or
services.
Ratios are only as informative as the financial
statements on which they are based. - ratios are not
very useful in detecting fraud (or unintentional
mistakes) in the accounting system.
With some ratios it is difficult to tell where a ratio
value changes from “good” to “bad.”
There is no clear and systematic way to sift all of the
ratio information into a single conclusion about an
organization’s overall health and performance.
Differences in ratio definitions may make it difficult to
compare ratios from different sources.
Accounting practices may differ between firms,
complicating comparisons of results between firms.