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Definitions and Formulas Related to Ratios Analysis

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You are here: Home E-Notes FIN630: Investment Analysis & Portfolio Management Definitions and Formulas Related to Ratios Analysis

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Definitions and Formulas Related to Ratios Analysis

Published on Wednesday, 14 September 2011 00:00 Written by Fuad Hasan

Definitions & Formulas Related to Ratios Analysis

(Composed & Solved by Hafiz M Usman www.vuzs.net)

Ratio Analysis
Ratio analysis is basically used to understanding the financial health of a business entity. With the help of ratios we can easily calculate from current year performance of the companies and are then compared to previous years. Ratio analysis conducts a quantitative analysis of information in a companys financial statements. These Ratios are most commonly used in banking sector can be divided into five main categories
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Definitions and Formulas Related to Ratios Analysis

Liquidity Ratios Leverage Ratios Profitability Ratios Activity Ratios Market Ratios A) Liquidity Ratios Liquidity Ratios are used to determine a company's ability to meet its short terms obligations. These include; 1) Current Ratio 2) Acid Test Ratio 3) Working capital

Current Ratio What Does Current Ratio Mean? A liquidity ratio that measures a company's ability to pay short-term obligations. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". OR It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. Formula = Current Assets / Current Liabilities This ratio answer in Times

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Acid Test Ratio What Does Acid-Test Ratio Mean? A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. Also known as the "Acid-test ratio" or the "Quick assets ratio" or Liquidity ratio. OR An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Formula = Current Assets Inventories Prepaid Expense / Current Liabilities OR Acid Test Ratio = Quick Assets / Current Liabilities Quick Assets = Current assets - (Stock + Prepaid Expenses) This ratio answer in Times

Debt Ratio
Working Capital What Does Working Capital Mean?

Current

In Debt

Debt Funds

A measure of both a company's efficiency and its short-term financial health. Also called net current assets or current capital. OR The cash available for day-to-day operations of an organization. Net liquid assets computed by deducting current liabilities from current assets. The amount of available working capital is a measure of a firm's ability to meet its short-term obligations. Formula = Current Assets Current Liabilities

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This ratio answer in Rs

(Composed & Solved Hafiz M Usman www.vuzs.net)

B) Leverage Ratios Leverage ratios measure the degree of protection of suppliers of long term funds. These include: 1) Times Interest Earned 2) Debt Ratio 3) Debt / Equity Ratio 4) Debt to Tangible Net worth Ratio 5) Total Capitalization Ratio Times Interest Earned What Does Times Interest Earned - TIE Mean? A metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. OR The times interest earned ratio indicates the extent of which earnings are available to meet interest payments. The times interest earned ratio is an indicator of a companys ability to meet the interest payments on its debt. Formula = Earning Before Income Tax (EBIT) + Interest Expense / Interest Expense This ratio answer in Times Debt Ratio
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Definitions and Formulas Related to Ratios Analysis

What Does Debt Ratio Mean? A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. OR Debt ratio indicates the percentage of a company's assets that are provided via debt or liability. Formula = Total Liabilities / Total Assets This ratio answer in % (Composed & Solved Hafiz M Usman www.vuzs.net) Debt/Equity Ratio What Does Debt/Equity Ratio Mean? It indicates what proportion of equity and debt the company is using to finance its assets. A measure of a company's financial leverage. Formula = Total Liabilities / Total Shareholder Equity This ratio answer in %

In Debt
Debt to Tangible Net worth Ratio

Debt Funds

Assets

Help Debt

What Does Tangible Net Worth Mean? A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, patents and intellectual property. Tangible net worth is calculated by taking a firm's total assets and subtracting the value of all liabilities and intangible assets. Formula = Total Debt / Tangible Net Worth Tangible Net Worth = Total Assets Intangible Assets Total Liabilities
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Definitions and Formulas Related to Ratios Analysis

This ratio answer in % Total Capitalization Ratio What Does Long-Term Debt To Capitalization Ratio Mean? The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth. Formula = Long Term Debt / (Long Term Debt + Shareholder Equity) This ratio answer in %
(Composed & Solved Hafiz M Usman w w w .vuzs.net)

C) Profitability Ratios Profitability ratios measure the earning ability of a firm. These include: 1) Net Profit Margin 2) Return on Assets 3) DuPont Return on Assets 4) Operating Income Margin 5) Return on Operating Assets 6) Return on Total Equity 7) Gross Profit Margin

Pay Debt
Net Profit Margin What Does Profit Margin Mean?

Debt Market Cash Equity Out of Debt

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out
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Definitions and Formulas Related to Ratios Analysis

of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. Formula = (Net Income / Net Sales) x 100 This ratio answer in % Return on Assets What Does Return On Assets - ROA Mean? An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings or revenues. Formula = (Net Income / Total Assets) x 100 This ratio answer in % DuPont Return on Assets What Does DuPont Identity Mean? An expression that breaks return on equity (ROE) down into three parts: profit margin, total asset turnover and financial leverage. It is also known as "DuPont Analysis". Formula = (Net Income / Sales) x (Sales / Total Assets) x 100 This ratio answer in %
(Composed & Solved Hafiz M Usman w w w .vuzs.net)

Operating Income Margin What Does Operating Margin Mean? A ratio used to measure a company's pricing strategy and operating efficiency. Formula = Earning before Interest and Taxes (EBIT) / Net Sales x 100
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Definitions and Formulas Related to Ratios Analysis

This ratio answer in %

Return on Operating Assets The return on operating assets measure only includes in the denominator those assets actively used to create revenue. This focuses management attention on the amount of assets actually required to run the business, so that it has a theoretical targeted asset level to achieve. A typical result of this measurement is an ongoing campaign to eliminate unnecessary assets. Formula = Earnings before Interest and Taxes / Operating Assets x 100 OR Formula = Net Income / Operating Assets x 100 This ratio answer in %

Return on Total Equity What Does Return On Equity - ROE Mean? The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Formula = Net Income / Total Equity x 100 This ratio answer in %

Gross Profit Margin What Does Gross Profit Margin Mean?

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Definitions and Formulas Related to Ratios Analysis

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue / sales left after subtracting the cost of goods sold. Formula = Gross Profit / Net Sales x 100 This ratio answer in %

D) Activity Ratios Activity ratios measure a firm's ability to convert different accounts within Their balance sheets into cash or sales. These include: 1) Total Assets Turnover 2) Fixed Assets Turnover

COMMENTS
1 2

#14 R.Ramakrishnan 2013-04-06 11:27 Can we also add the healthy situation of the company in this

+1 Quote

#13 R.Ramakrishnan Great refresher

2013-04-06 11:25

0 Quote

#12 Edson Hale

2013-04-05 22:23

0 Quote

thanks a lot it helped me a lot in solving my immediate problem of making a financial report of my company

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#11 Ali Niaz 2013-03-25 15:55 good work keep it up

0 Quote

#10 grv chhn 2012-12-29 23:34 thnxx bt if u discribe all the information in easy way it wud help alot....

+1 Quote

#9 AYESHA

2012-10-31 17:06

+3 Quote

GREAT JOB WELL DONE

#8 Shamail Shahid 2012-09-24 20:37 I think you should to define the logics and concept behind each ratio, although overall good effort, and it is appreciateable. Thanks

Quote

#7 SAFDAR HUSSAIN

2012-08-02 04:38

+2 Quote

Execellent, its very help full for students

#6 ali

2012-06-13 12:52

+2 Quote

Gud one nyc work.....

#5 ali

2012-06-13 12:51

+2 Quote

gud one nyc work....

Refresh comments list

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Definitions and Formulas Related to Ratios Analysis

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