Financial Analysis Ratios

1. Current ratio is a financial ratio that measures whether or not a company has
enough resources to pay its debt over the next business cycle (usually 12 months) by
comparing firm's current assets to its current liabilities. The higher the current ratio is,
the more capable the company is to pay its obligations. Current ratio is computed as
current assets divided by current liabilities.
Quick Ratio is an indicator of company's short-term liquidity. It measures the
ability to use its quick assets (cash and cash equivalents) to pay its current liabilities.
Therefore, quick ratio higher than 1:1 indicates that the business can meet its current
financial obligations with the available quick funds on hand. Quick ratio is computed
as quick assets divided by current liabilities.
Total asset turnover ratio measures the ability of a company to use its
assets to efficiently generate sales. The company has a higher turnover ratio which
tells it can generate more sales with fewer assets because it is using its assets
efficiently. To get the total asset turnover, divide the sales by average total assets.
Rate on Net Sales to Assets is used to compare how much in assets a
company has relative to the amount of revenues the company can generate using
their assets. The company has high ratios which mean it is using its assets more
efficiently. Ratio of net sales to assets is computed as net sales divided by average
total assets.
Inventory turnover is the ratio of cost of goods sold by a business to its average
inventory during a given accounting period. In general, a higher value of inventory
turnover indicates better performance and lower value means inefficiency in
controlling inventory levels. To get the inventory turnover, divide cost of goods sold
by average inventory.
Number of days Sales in Inventorymeasures the number of times per period;
a business sells and replaces its entire batch of inventory again. To get the number
of days, divide the average inventory to average daily cost.
Ratio of Liabilities to Equity measures the degree to which the assets of the
business are financed by the debts and the shareholders' equity of a business. A
debt-to-equity ratio of 1.00 means that half of the assets of a business are financed
by debts and half by shareholders' equity. It is computed as total liabilities divided by
total equity.
Gross profit margin ratio is the ratio of gross profit of a business to its
revenue. It is a profitability ratio measuring how profitable a company sells its

2. inventory or merchandise. The gross profit margin is calculated by subtracting cost of
goods sold from sales divided by sales.
Net profit margin is the most basic profitability ratio that measures the
percentage of net income of an entity to its net sales. It indicates how well the
company converts sales into profits after all expenses is subtracted out. To get the
net profit margin, divide the net income by sales.
Return on assets is the ratio of annual net income to average total assets of a
business during a financial year. It measures efficiency of the business in using its
assets to generate net income. Thus higher values of return on assets show that
business is more profitable. The ROA is computed as net income divided by
operating assets.
Return on Investments is performance measure used to evaluate the efficiency
of investment. A higher ROI means that investment gains compare favorably to
investment costs. The ROI is computed as average income divided by investment
Rate earned on Total Assets is the ratio considered as an indicator of how
effectively a company is using its assets to generate earnings before contractual
obligations must be paid. To get the rate earned on total assets, divide the net
income by average total assets.
Variable costs are those costs that vary depending on a company's production
volume; they rise as production increases and fall as production decreases.
Fixed cost are costs that does not change with an increase or decrease in the
amount of goods or services produced. Fixed costs are expenses that have to be
paid by a company, independent of any business activity.
Contribution margin measures how efficiently a company can produce
products and maintain low levels of variable costs. To get the contribution margin, get
the difference between selling price and variable cost per unit.
Break-even point is the production level where total revenues are equal to
total expenses. Since revenues equal expenses, the net income for the period will be
zero. The company didn’t lose any money during the period, but it also didn’t gain
any money either. To get the break-even point, divide the fixed cost by contribution
margin.

3. Break-even sales mean no profit or loss, also called breakeven point. It is the
sales volume, in units or in pesos, where total sales revenue equals total costs. Thus,
zero profit results. A break-even sale is computed as fixed cost divided by
contribution margin ratio.
Internal Rate of Return (IRR) is the discount rate at which the net present
value of an investment becomes zero. This is commonly used to evaluate the
desirability of investments or projects. The higher a project's internal rate of return,
the more desirable it is to undertake the project.