Financial ratios used figures in the financial statement to interpret the data and have an in-depth analysis of business performance. Owners, investors, bankers, analysts, and other stakeholders used financial analysis to guide business decisions such as investment, capital expenditure, and funding sources.
To give an overview of the different types of financial ratios and easy reference, below are the financial ratios cheat sheet and formulas. Liquidity and Profitability Ratios Definitions and Formulas 1. Liquidity Ratios Liquidity ratios are used to assess a company's capacity to pay off its debt without seeking external capital. Mostly used liquidity ratios are cash ratio, quick ratio, and current ratio. a. Cash Ratio The cash ratio is derived by dividing the cash and cash equivalents by the current liabilities. It assesses business liquidity by using the most liquid assets. Formula: Cash Ratio = Cash & Cash Equivalents / Current Liabilities b. Quick Ratio(Acid-Test) The quick ratio is more conservative compared to the current ratio. It is computed by adding cash & cash equivalents and receivables divided by current liabilities. Inventory is excluded since it takes more time to dispose of. Another way to compute is current assets – inventory divided by current liabilities. Formula 1: Quick Ratio = (Cash + Receivables)/Current Liabilities Formula 2: Quick Ratio = (Current Assets – Inventory) / Current Liabilities c. Current Ratio The current ratio evaluates current assets' availability to pay current obligations or those payable within a year. Current assets include cash & cash equivalents, receivables, and inventory. The current ratio is computed by taking current assets then divided by current liabilities. Formula :Current Ratio = Current Assets / Current Liabilities 2. Profitability Ratios Profitability ratios assess a company's ability to earn profit to its capital, equity, assets, revenue, and costs. These include gross profit margin, EBITDA margin, net profit margin, ROA, and ROE. a. Gross Profit Margin The gross profit margin is derived by taking the gross profit then divided by net sales. It shows the business's capacity to earn a profit after deducting COGS -- or revenue costs for a service industry. Formula: Gross Profit Margin = Gross Profit / Net Sales b. EBITDA Margin Production costs and operating expenses are deducted to derive Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). The EBITDA margin is then computed by taking EBITDA divided by net sales. Formula: EBITDA Margin = EBITDA/ Net Sales c. Net Profit Margin Net income is calculated by deducting COGS, administrative & marketing expenses, interest, tax, depreciation, and amortization. Net income is divided by net sales to compute for net profit margin. Formula: Net Profit Margin = Net Income / Net Sales d. Return on Assets (ROA) Return on assets is most relevant for asset-intensive companies such as manufacturing plants and telecom. ROA measures how effectively a company utilizes assets to earn a profit. It is computed by adding the net income + interest divided by average assets. Formula: Return on Assets = (Net Income + Interest) / Average Assets e. Return on Equity (ROE) Return on equity assesses how much income is generated by the equity. It is evaluated by owners, investors, and analysts to measure how much can earn for every dollar invested. ROE is derived by taking the net income then divided by the average shareholders' equity. Formula: Return on Equity = Net Income / Average Shareholders’ Equity These financial ratios cheat sheet is helpful reference for definitions and formulas of liquidity and profitability ratios. You can also compute other financial ratios, such as the efficiency ratios, growth ratios, and leverage ratios, to make your analysis more comprehensive.
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