RATIO ANALYSIS OF FINANCIAL STATEMENTS

Ratio analysis is a method of analyzing financial statements to assess a company's financial performance and condition. Ratios compare financial data to identify trends and relationships.

CATEGORIES OF RATIOS:

LIQUIDITY RATIOS:

• Current Ratio = Current Assets / Current Liabilities

• Quick Ratio = (Current Assets - Inventory) / Current Liabilities

• Measures ability to pay short-term obligations

SOLVENCY RATIOS:

• Debt to Equity Ratio = Total Debt / Total Equity

• Interest Coverage Ratio = EBIT / Interest Expense

• Measures long-term financial stability

PROFITABILITY RATIOS:

• Gross Profit Margin = Gross Profit / Revenue

• Net Profit Margin = Net Profit / Revenue

• Return on Assets (ROA) = Net Income / Total Assets

• Return on Equity (ROE) = Net Income / Shareholders' Equity

ACTIVITY RATIOS (EFFICIENCY RATIOS):

• Asset Turnover = Revenue / Total Assets

• Inventory Turnover = Cost of Goods Sold / Average Inventory

• Measures operational efficiency

MARKET RATIOS:

• Earnings Per Share (EPS) = Net Income / Number of Shares

• Price to Earnings (P/E) Ratio = Market Price per Share / EPS

• Used by investors for valuation

IMPORTANCE OF RATIO ANALYSIS:

• Identifies financial strengths and weaknesses

• Facilitates comparison with competitors and industry benchmarks

• Helps stakeholders make informed investment decisions

• Supports management in financial planning