Financial Ratio Analyses and

Their Implications to
Management
Falcon, Aprilyn
Cudillo, Jeneth
Buar, Jesamae
What is financial ratio is?
Ratios present relationships between two variables. Financial
ratios, therefore refer to the relationships between financial statement
items or accounts expressed in mathematical fashion.
• Some of the standard ratios used are based on:
1. Company budget for the same period;
2. Those used by the industry to which the firm belongs;
3. Those used by the firm’s successful competitor’s
4. Those used by the firm using prior periods; and
5. Those used by the analyst in the past.
• There should be consistency in the computation as well as usage of
ratios to ensure comparability between results and prevent their
misinterpretations. Just like any financial analysis technique, financial
ratios are subject to limitations.
• Results derived from the computation of ratios could be presented as
a percentage (%), a fraction (1/4), a Peso amount (P25.50), or a
relative ratio (2:1).
 Riel Corporation
Comparative Statements of Financial Position
December 31, 2015 and 2014
2015 2014
Assets
Current Assets
Cash & Cash Equivalent 106,789 102,375
Trade & Other Receivables 327,611 277,467
Inventory 334,863 297,654
Prepaid Expenses 101,565 114,813
Total Current Assets 870,828 792,309

Non-Current Asset
Property, Plant & Equipment 135754 166,481
Intangibles 7,500 7,500

Total Noncurrent Asset 143,254 173,981

Total Assets 1,014,084 966,290

Liabilities and Shareholder’s Equity
Current liabilities
Trade & Other Payables 238,000 208,703
 Unearned Revenues 107,508 82,456
Notes Payable-current 45,000 45,000
Total current liabilities 390,508 336,159
Non-Current Liabilities

Notes Payable-non-current 208,422 253,500

Total Liabilities 598,930 589,659

Shareholders” Equity
Preference Shares, P100 par 105,000 105,000
Ordinary Shares, P1 par 15,000 15,000
Premium on Ordinary Shares 135,000 135,000
Total paid-in-capital 255,000 255,000

Retained Earnings 160,152 121,631

Total Shareholders” Equity 415,152 376,631
Total Liabilities & Shareholders’ Equity 1,014,082 966,290
 Riel Corporation
Comparative Income Statements
For the period ending December 31, 2015 and 2014
2015 2014
Sales 3,007,887 2,732,712
Less: Cost of good sold 2,208,520 1,964,865
Gross Profit 799,367 767,847
Less: Selling Expenses 372,000 345,000
Administrative Expenses 207,000 213,000
Total Operating Expenses 579,000 558,000
Operating Income 220,367 209,847
Less: Interest Expense 41,860 43,905
Net income before taxes 178,507 165,942
Less: Income Tax 62,477 58,080
Net Income after taxes 116,030 107,862
In doing the analysis we shall cover the company status in terms of:
1. Liquidity- pertains to the firm’s ability to pay any immediate and
incoming cash disbursements (payment of payables, and operating
costs and expenses).
2. Asset utilization- measures how often is the turn over of accounts
receivable, inventory and long-term assets.
3. Debit-Utilization (Leverage)- estimates the overall debt status of the
firm in light of its asset base and earning power.
4. Profitability- this measures the firm’s capacity to earn sufficient
return on sales, total assets and owners’ investment.

Solution:
Liquidity/Short-term solvency
1. Current ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡 𝑜𝑓 𝑃870,828
(2015)= = 2.23:1 or 223%
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑃390,508
(2014)= ?
Upward and Downward Movement of Current Ratio
Movements in current ratio components give rise to changes in
the current ratio. Ponder in the following statements and
experiment using the figures of Riel Corporation:
a. Increase in current assets or decrease in current liabilities increases the
current ratio.

Components Previous current ratio Increase New current ratio

(decrease)
Total current asset P 50,000 P10,000 P 60,000
Total current liabilities P 25,000 P 25,000

Current ratio = 2:1 2:4:1 increase

Components Previous current ratio Increase New current ratio

(decrease)
Total current assets P 50,000 P 50,000
Total current liabilities P 25,000 P (10,000) P 15,000
Current ratio = 2:1 3:3:1
b. If the current ratio is 1:1 and there is an increase or decrease of the
same amount on both the total current assets and total current
liabilities, it shall have no effect on the new current ratio will be the
same as the previous.

Components Previous current ratio Increase of equal New current ratio

amounts
Total current assets P 50,000 P 10,000 P 60,000
Total current liabilities P 50,000 P 10,000 P 60,000
Current ratio = 1:1 1:1 no effect/same ratio
c. If the previous current ratio is positive (current assets > current liabilities),
and there is an increase by the same amount in both total current assets and
total current liabilities, the ratio shall decrease and vice-versa. The opposite
will occur if the previous current ratio is negative (current liabilities > current
assets).
Components Previous current ratio Increase of equal New current ratio
amounts
Total current assets P 50,000 P 10,000 P 60,000
Total current liabilities P 25,000 P 10,000 P 60,000
Current ratio = 2:1 positive 1:71:1 decrease
Components Previous current ratio Increase of equal New current ratio
amounts
Total current assets P 25,000 P 10,000 P 35,000
Total current liabilities P 50,000 P 10,000 P 60,000
Current ratio 0:5:1 negative 0:53:1 increase
2. Acid Test Ratio/quick ratio/liquidity ratio

𝑄𝑢𝑖𝑐𝑘 𝑎𝑠𝑠𝑒𝑡𝑠 𝑜𝑟 𝐶𝑎𝑠ℎ+𝑇𝑟𝑎𝑑𝑖𝑛𝑔 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑜𝑓 𝑃106,789+327,611

(2015) = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑃390,508
= 1.11:1 or 1.11%
(2014) =
Asset Utilization Liquidity Analysis
1. For Accounts Receivable
Accounts Receivable Turnover

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑓 𝑃3,007,887

(2015) = = 9.94 times
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑜𝑓 227,467+327,611
2
(2014) =

Note: For the 2014 receivable turnover you may use the ending inventory of 2014
as the average inventory.
Days’ Sales in Average Receivables or Average Collection Period

365 𝑑𝑎𝑦𝑠
(2015) = = 36.7 days
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑜𝑓 9.94 𝑡𝑖𝑚𝑒𝑠

(2014) =
2. For Inventory
Inventory Turnover Ratio
The turnover ratio pertains to the number of times the average
inventory is sold (finished goods & merchandise), or used (raw
materials), or processed (work in process). The following formulas are
adapted depending on the nature of the inventory being assessed:

Raw Materials
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑈𝑠𝑒𝑑
Inventory Turnover =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Work in Process
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑑
Inventory Turnover =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑊𝑜𝑟𝑘 𝑖𝑛 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Finished Goods
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
Inventory Turnover =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Merchandise
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
Inventory Turnover =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑒𝑟𝑐ℎ𝑎𝑛𝑑𝑖𝑠𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦+𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Average Inventory =
2
 In our example we used Merchandise Inventory, hence the
turnover rate is computed as:

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝑜𝑓 𝑃2,208,520

(2015) =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑓 𝑃297,654,+𝑃334,863

(2014) =

Note: Use ending inventory of 2014 to compute 2014 inventory

turnover.
 The inventory turnover indicates the company’s efficiency in
managing and disposing inventory.

Number of Days in Inventory or Average Sale Period

365 𝑑𝑎𝑦𝑠
(2015) = = 52.30 days
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑜𝑓 6.98 𝑡𝑖𝑚𝑒𝑠

(2014) =
3. Property, Plant and Equipment (PPE) or Fixed Asset Turnover

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑓 𝑃3,007,887

(2015) = = 19.90:1
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑃𝑃𝐸 𝑜𝑓 𝑃135,754+𝑃166,481
2

(2014) =

This turnover indicated the firm’s efficiency in using their PPE in

generating revenue.
4. Total Asset Turnover

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑓 𝑃3,007,887

(2015) = = 3.04:1 or 304%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑃1,014,082+966,290
2

(2014) =

This ratio presents the company’s efficiency in utilizing their total assets
to generate revenue.
Debt-Utilization (Leverage) Ratios
the leverage ratios allow the analyst to ascertain hoe efficient
the company manages its financial obligations.

1. Debt to Equity Ratio

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑃598,930

(2015) = = 1.44:1 or 144%
𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦 𝑜𝑓 𝑃415,152

(2014) =
 The use of borrowed funds in carrying out the firm’s operation is
called trade on equity. This means that the firm is willing to borrow
money and pay fixed interest charges from the loan. The borrowed
money will be used to increase volume of operation and ultimately
earn more profit. This is an example of financial leverage.
2.. Debt Ratio

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑃598,930

(2015) = = 0.59:1 or 59%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑜𝑓 𝑃1,014,082

(2014) =
3. Number of Times Interest Earned

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑜𝑟

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑃220,367
(2015) = 5.26 times
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑃41,860

(2014) =
Profitability Ratios
1. Gross Profit Ratio

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑃799,367

(2015)= = 0.26 or 0.26:1 or 26%
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑓 𝑃3,007,887

(2014) =
2. Net Profit Ratio or Profit Margin

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑃116,030

(2015) = = 0.039:1 or 3.9%
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑓 𝑃3,007,887

(2014) =
3. Return on Assets (ROA)

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑃116,030

(2015) = = 0.12:1 or 12%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑜𝑓 𝑃1,014,082+966,920
2
or
(Du Pont Method) = Net Profit ratio of 3.9% x Total asset turnover of
3.04 = 125

(2014) =
4. Return on Equity

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑃116,030

(2015) = = 0.29:1 or 29%
𝐴𝑣𝑒.𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑒𝑞𝑢𝑖𝑡𝑦 𝑜𝑓 𝑃415,142+𝑃376,631
2

(2014) =
5. Du Pont System of Analysis
The model includes the following formula to compute return on
equity:
Return on Assets = Profit or Net profit ratio x Asset turnover
Debt Ratio = total liabilities/ Total Assets
Equity Ratio = 1 – Debt ratio

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑠𝑠𝑒𝑡𝑠
Return on Equity =
𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜
(Du Pont Method)
Using the analysis for Riel Corporation:
Return on Asset = 12%
(Du Pont)

Debt Ratio = 59%

12%
Return on Equity = = 29%
1−59%
Ratios Used To Gauge Company Liquidity or Short-term Solvency
Ratio Formula Significance
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 Signifies the firm’s capacity to pay
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 or meet current financial
obligations.
1. Current ratio Note : Some Analyst do not include
prepaid expenses in the computation of
the current assets.
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 A stricter test of liquidity Suggest
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 the firm’s ability to pay current
2. Quick ratio financial obligations by considering
QA = cash + trading securities + trade and more liquid current assets.
other receivables
3. Current Assets to Total 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 Suggest the relative liquidity of the
assets or Working capital to 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 total assets and shows the
Total assets proportion of current assets to total
assets.
4. Each current asset item to total 𝐸𝑎𝑐ℎ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 𝑖𝑡𝑒𝑚 Signifies the proportion of each
current asset 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 current asset item to total assets. It
also indicates the liquidity of the
current assets and the breakdown
of each component.
5. Cash flow liquidity ratio 𝐶𝑎𝑠ℎ 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 Gauges the firm’s ability to pay
+ 𝑇𝑟𝑎𝑑𝑖𝑛𝑔 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + current financial obligations by
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑖𝑛𝑔 considering cash and other cash
𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠 equivalents.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
6. Defensive Interval ratio 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Indicates the coverage of current
𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝐶𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 liabilities.
Ratios Used To gauge Asset Management Efficiency and Liquidity
Ratio
1. Receivable Turnover
2. Average collection Period or
Number of Days Receivables
3. Merchandise Turnover
Formula Significance
Signifies the number of times the
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 average receivables are collected
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 during the year. It also measures
the firm’s efficiency in collecting
their receivables.
This ratio is very much related to
365 𝑑𝑎𝑦𝑠 𝑜𝑟 360 𝑑𝑎𝑦𝑠 accounts receivable turnover. It
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 indicates the number of days the
firm collects its average
receivables. It implies the efficiency
of the firm in collecting their
receivables.
Suggest the number of times the
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 average inventory was disposed of
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑒𝑟𝑐ℎ𝑎𝑛𝑑𝑖𝑠𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 during the accounting period. It
also signifies the over or under
investment of the firm I n their
inventory.
 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑠𝑜𝑙𝑑 Suggest the number times the
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑓𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑔𝑜𝑜𝑑𝑠 average inventory was disposed of
4. Finished Goods Turnover 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 during the accounting period. It also
signifies the over or under
investment of the firm in their
inventory.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑑 Signifies the number of times
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑊𝑜𝑟𝑘 𝑖𝑛 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 average inventory was produced
5. Work in Process Turnover 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 during the accounting period. It
also indicates the time taken to
produce products.
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑈𝑠𝑒𝑑 Measures the number of times
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 average raw materials inventory was
6. Raw materials Turnover 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 used during the period. It also
indicates the sufficiency of the raw
materials available.
365 𝑑𝑎𝑦𝑠 𝑜𝑟 360 𝑑𝑎𝑦𝑠 Indicates the number of days by
7. Number of Days in Inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 which inventories are used or sold.
Implies the firm’s efficiency in
consuming or selling inventories.

8. Working Capital Turnover
9. Current Asset Turnover
10. Payable Turnover
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 + Signifies the pace by which
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 working capital is used. It also
(𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 𝑛𝑜𝑡 indicates the adequacy of working
𝑟𝑒𝑞𝑢𝑖𝑟𝑖𝑛𝑔 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙) capital in the firm’s operations.
𝑂𝑅
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 + Signifies the pace by which current
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + assets are used. It also indicates
𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠 + 𝑂𝑡ℎ𝑒𝑟 the adequacy of current assets in
𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑐ℎ𝑎𝑟𝑔𝑒𝑠 the firm’s operations.
𝑛𝑜𝑡 𝑟𝑒𝑞𝑢𝑖𝑟𝑖𝑛𝑔 𝑐𝑢𝑟𝑟𝑒𝑛𝑡
𝑎𝑠𝑠𝑒𝑡𝑠 𝑙𝑖𝑘𝑒 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑
𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑜𝑟 𝑁𝑒𝑡 Signifies the firm’s ability to pay
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 trade payables. It also measures
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑎𝑛𝑑 𝑂𝑡ℎ𝑒𝑟 the number of times the amount of
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑜𝑟 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 average payables is paid during the
accounting period.
11. Operating Cycle
(Trading Concern)
12. Operating Cycle
(Manufacturing Concern)
13. Days Cash
14. Asset Turnover
15. Property, Plant &
Equipment Turnover
or Fixed Asset Turnover
Days’ sales in merchandise
inventory + No. of days to collect
receivables
𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 ′ 𝑢𝑠𝑎𝑔𝑒 𝑖𝑛 𝑟𝑎𝑤
𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑁𝑜. 𝑜𝑓
𝑑𝑎𝑦𝑠 𝑖𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑟𝑜𝑐𝑒𝑠𝑠 +
𝑁𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠 ′ 𝑠𝑎𝑙𝑒𝑠 𝑖𝑛 𝑓𝑖𝑛𝑖𝑠ℎ𝑒𝑑
𝑔𝑜𝑜𝑑𝑠 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑁𝑜. 𝑜𝑓
𝑑𝑎𝑦𝑠 𝑡𝑜 𝑐𝑜𝑙𝑙𝑒𝑐𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑎𝑠ℎ 𝐵𝑎𝑙𝑎𝑛𝑐𝑒
𝐶𝑎𝑠ℎ 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
365 𝑑𝑎𝑦𝑠 𝑜𝑟 360 𝑑𝑎𝑦𝑠
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑃𝐸 𝐴𝑠𝑠𝑒𝑡𝑠
Measures the length of time in
order to convert cash to inventory
to receivables and back to cash.
Measures the length of time in
order to convert cash to raw
materials inventory to work-in-
process to finished good inventory
to receivables and back to cash.
Indicates the ability of the firm’s
cash to pay the average daily cash
obligations.
Indicates the firm’s ability to
efficiently manage their assets to
generate revenue.
Indicates the firm’s ability to
efficiently manage their PPEs to
generate revenue.
Ratios Used To gauge Firm’s Utilization of Debt and Company Stability
Ratio
1. Debt to Equity Ratio
2. Equity to Debt Ratio
3. Proprietary or Equity Ratio
4. Debt Ratio
Formula Significance
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Measures the relationship or
𝑂𝑤𝑛𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 proportion of the capital provided
by creditors to the capital provided
by owners.
𝑂𝑤𝑛𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 Measures the margin of safety of
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 creditors.
𝑂𝑤𝑛𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 Measures the proportion of the
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 firm’s assets coming from its
owners. Signifies financial stability
of the firm and cautions the
creditors.
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 Measures the proportion of the
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 firm’s assets coming from its
creditors. It also signifies the extent
of trading on equity.
5. Fixed Assets to Total
owners’ equity
6. Fixed Assets to Total
Assets
7. Fixed Assets to Total Long-term
Liabilities
8. Plant Turnover
9. Book Value per Share
𝑃𝑃𝐸 𝑜𝑟 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑛𝑒𝑡)
𝑂𝑤𝑛𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦
𝑃𝑃𝐸 𝑜𝑟 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 (𝑛𝑒𝑡)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑃𝑃𝐸 𝑜𝑟 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 (𝑛𝑒𝑡)
𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠𝑙
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑃𝑃𝐸 𝑜𝑟 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 (𝑛𝑒𝑡)
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′
𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠
𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Measures the portion of the
owners’ equity used to acquire fixed
assets.
Signifies whether the firm over or
under invested in PPE.
Measures the extent covered by the
carrying value of PPE to ling-term
obligations.
Signifies the firm’s efficiency in using
their PPE.
Measures the carrying value of net
assets for every ordinary share
outstanding. It also indicates the
amount which the shareholders can
recover if the firm sells its assets
upon liquidation or converts them
into cash at their book values.
10. Number of Times Interest
Earned
11. Number of Times Preference
Shares Dividend Requirement is
Earned
12. Number of Times Fixed Charges
are Earned
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 Signifies the firm’s capacity in
𝑎𝑛𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥𝑒𝑠 paying fixed interest charges. It
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 measures the number of times
interest charges is covered by the
firm’s operating income.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 Measures the firm’s ability to pay
𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑆ℎ𝑎𝑟𝑒𝑠 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 the preference shareholders’
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 dividend requirement.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥𝑒𝑠 Indicates the firm’s ability to pay
𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 annual fixed charges.
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (𝑅𝑒𝑛𝑡,
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡, 𝑆𝑖𝑛𝑘𝑖𝑛𝑔 𝐹𝑢𝑛𝑑
𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠)
Ratios Used To Gauge Firm’s Profitability and Return to Owners
Ratio
1. Rate of Return on Sales or Net
Profit Ratio or Net Profit margin
2. Rate of Return to Total Assets
(ROA)
3.Asset Turnover
Formula Significance
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 Measures the amount of net
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 income per peso of sales. It also
shows the proportion of net
income to the firm’s sales revenue.
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑆𝑎𝑙𝑒𝑠 𝑥 𝐴𝑠𝑠𝑒𝑡 Measures the company’s
𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 profitability in using their total
𝑂𝑅 assets. It indicates the net income
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 generated by using the firm’s total
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 assets. Signifies management
efficiency in using their assets to
earn income.
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Signifies management efficiency in
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 using their assets to generate sales
revenue.
4. Gross Profit ratio
5. Operating Ratio
6. Cash flow margin
7. Rate of Return on Current Assets
or Working Capital
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 Measures the gross profit per peso
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 of sales revenue. This ratio is
important in ascertaining the
adequacy of gross profit to meet
operating expenses plus their
desired profit.
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 Measures the portion of sales
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 revenue used to cover operating
costs.
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 Indicates the firm’s ability to
𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠 translate sales into cash.
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 Gauges management efficiency in
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 using current assets to generate
net income.
8. Rate of Return on net working
capital (Current assets- current
liabilities
9. Rate of Return on Owners’ Equity
10. Earnings Per Share
11. Price-earning Ratio
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 Measures management efficiency
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 in using net working capital to
generate revenue.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 Indicates the amount of return per
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑤𝑛𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 peso of owners’ equity. Gauges
management efficiency in using its
invested capital to generate
revenue.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 Measures the peso return on each
𝑠ℎ𝑎𝑟𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 ordinary share issued. Signifies the
𝑁𝑜. 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 firm’s ability to pay dividends.
𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 Indicates the relationship between
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 the market price of ordinary shares
and the earnings of each ordinary
share.
12. Earning-Price Ratio or 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Capitalization Rate 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆𝑎ℎ𝑟𝑒
13. Dividends Per Share 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑎𝑖𝑑 𝑜𝑟 𝐷𝑒𝑐𝑙𝑎𝑟𝑒𝑑
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
14. Payout Ratio or Dividends 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Payout 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
15. Retained Earnings to Share 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
Capital 𝑆𝑎ℎ𝑟𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
16. Market Price to Book Value per 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Share 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Measures the rate at which the
share market is capitalizing the
value of current earnings.
Indicates the earnings distributed
to the owners on a per share basis.
Measures the percentage of the
company’s earnings paid to
owners.
Measures the probability of
declaration of dividends by the
firm.
Signifies the under or over-
valuation of shares.