Financial ratios

1. FINANCIAL RATIOS
Dr. Ashraf Salah Eldin

2. 7/14/20XX Pitch deck title 2
ABOUT
(1) Liquidity Ratios:
A - Current ratio = Current assets / Current Liabilities
If x/y =2
Every unit of the denominator (liab.) is covered /backed up / yield
/ financed / by 2 units of the nominator (asset)
B - Quick or Acid ratio = (Current assets – Inventory)
/ Current Liabilities
C- Cash ratio = (CA – INV. – AR – S.T. Invest) or cash in
kind / CL

3. Liquidity of AR:
- Average Collection Period (ACP) = (Balance of AR X 360) / Credit
Sales
If credit sales not given, assume all sales are on credit
Liquidity of Inventory:
- Average selling Period (ASP) + Average Collection Period (ACP)
ASP = (Inventory X 360) / COGS
The larger the Liquidity of INV, the greater the need for cash to
finance operations

4. Condition for using ratios
1) Current ratios = both ACP + ASP can be liquidated in less
than 360 days for a good ratio.
2) Quick ratio = Liquidation of AR (ACP) < 360
Liquidation of Inventory > 360
3) Cash ratio = ACP > 360
Liquidation of Inventory > 360

5. (2) Debt Management Ratios:
A - Debt ratio = Total Debts / Total assets
B - Debt / Equity ratio = Total Debts / Equity
The Higher the ratios the more risky the Company is
C - Capital structure ratio (CSR) = LTL / (LTL + ME)
D - Interest Coverage Ratio = EBIT (Earning before Interest
& Tax) / I

6. (3) Assets utilization / management (activity
/efficiency ratios):
A - Total Assets Turnover (TAT) = Sales / Total assets
B - Fixed Assets Turnover (FAT) = Sales / FA
C - Current Assets Turnover (CAT) = Sales / CA
For
:
(
1
)
Cash To = Sales / Cash
(
2
)
AR To = Credit Sales / AR
(
3
)
Inventory To = COGS / Inventory
To = Turnover
D & E - Liquidity of AR & Liquidity of Inventory;
Same as before

7. (4) Profitability ratios:
A- sales:
1) GPM gross profit margin = GP / sales
2) OIM operating income margin = OI / sales =
( Sales-COGS -Others) / sales
3) NIM net income margin = NI / Sales
B- Financial performances:
Return on assets (investment) ROI = EBIT / Total Assets
Return on Equity (ROE) = EBT / Equity
C- ROBF = {ROI – (Interest / BF) {x (BF/OE)
D- ROE = ROI + ROBF

8. Dupont system of ratios
(ROI= EBIT/Total assets) x sales / sales
ROI =EBIT/Sales x Sales/ Total assets
ROI = x
Profitability x Efficiency
Net Profit
Margin TATO

9. Modern tech. of analysis
MVA
Market value added =
(No. of shares x
market value of shares) – total
O/E
EVA
Economic value added=
NP - total cost of capital
Long term bonds :Interest
Preferred shares : p.s. dividends
Common shares : dividends
R/E : assuming in the bank / opp.
Cost = 10%

10. Thank you