Financial ratio analysis and financial ratio formula
Financial ratios constitute a set of relationships that are associated with the financial information of a particular facility, and these ratios are used to compare several financial results, and examples of financial ratios are return on assets (ROA), return on investment (ROI), and other types of other ratios that It helps in the success of the financial measurement process, or knowing the account balances of the facility during a specific period of time.
- Financial analysis definition and objectives of financial analysis
- What financial analysis all you need to know about
Financial ratio analysis
Is a method used to compare a set of financial accounts by using mathematical means.
This analysis helps to understand the nature of business performance; By providing financial information to each of the company’s management, creditors, and investors, and the analysis of financial ratios is a management tool that contributes to the development of the work; By studying the financial results based on the use of indicators to measure and analyze the organizational performance of a company.
Types of financial ratios
The analysis of financial ratios depends on the use of a set of types of ratios that contribute to determining the financial results of the business. The following is information about the most important types of these ratios:
Income rates are categorized into the following types:
- Operating asset turnover rate: a ratio that is calculated when an increase in the value of sales appears; Which leads to an increase in the need to acquire more assets, and if the opposite appears, then the amount of sales is insufficient, and this percentage is expressed through the following law:
- Net Sales / Total Operating Assets = Operating Assets Turnover
- Value of Total Operating Assets = Total Assets – (Long Term Investments + Intangible Assets).
- Net sales to total tangible value: It is the ratio of personal investment in the business activity that is considered appropriate for sales, and it is expressed using the following law:
- Net sales / net tangible value = net sales to total tangible value
- Tangible net worth = owners’ equity – intangible assets
- The value of the operating income to the net sales ratio: It is a ratio that contributes to clarifying the profits resulting from the sales of the business, and it is expressed using the following law:
- Operating Income / Net Sales Value = Operating Income to Net Sales Ratio
Profitability Ratios are ratios that are directly related to income ratios, and are concerned with clarifying the financial returns resulting from investment and sales operations.
The following is information about the most important types of these ratios:
- Gross profit from net sales: a percentage that contributes to clarifying the rate of gross profit; If it is continuously declining from the average profit margin, then it indicates that something is wrong, and is an indication of the emergence of some problems in the future. This ratio is expressed using the following law:
- (Net Sales Value – Cost of Goods Sold) / Net Sales Value = Gross Profit from Net Sales
- Net profit from net sales value: It is a percentage that helps provide an initial assessment of the net profit of the investment, and it is expressed using the following law:
- Profit after taxation / net sales = net profit from net sales value
- Rate of return on management; It is a comparison of the percentage of profits between operating assets and operating income, and it is referred to as the special sum in fixed assets and net capital, and it is expressed in the following law:
- Operating Income / (Fixed Assets + Net Capital) = Return on Management
Liquidity Ratios are useful ratios for both bankers, suppliers, and creditors, and are considered of importance to financial managers who are interested in following up on the payment of obligations to suppliers.
These ratios are divided into the following types:
- The current ratio: It is a measure of the balance between current assets and current liabilities. This ratio helps to detect any changes that appear in the balance sheet list. The current ratio is expressed through the following law:
- (Current Assets/Current Liabilities) = Current Ratio; Where current assets are the net value of the expected obligations on all securities that will be receivable, and current liabilities are all debts that will be due within one year.
- Quick ratio: It is a financial ratio that helps determine the extent of the ability to convert current assets into money that contributes to covering all the value of current liabilities. The quick ratio is expressed using the following law:
- (Cash + Securities + Net Accounts Receivable) / Current Liabilities = Quick Ratio
- Absolute liquidity ratio: It is a means that helps to get rid of any irregularities that may affect the financial receivables, and this ratio is expressed in the following law:
- (Cash + Current Securities) / Current Liabilities = Absolute Liquidity Ratio
- Receivables turnover: It is an indicator used to indicate financial liquidity, and the turnover ratio of financial receivables, which indicates the management’s role in using the invested funds to pay the financial dues, and expresses the turnover of receivables using the following law:
- Total Sales on Credit/Average Receivable = Turnover of Accounts Receivable
- Average collection period: It is about choosing the type of work that is due; Which helps to determine the special average in the collection period; By relying on a basic rule in which the value of the sums of money receivable should not exceed the value of the sums that will be due within a period of time ranging from 10 to 15 days. The average collection period is expressed in the following law:
- (Accounts + Notes Receivable) / ((Annual credit net sales) / 365 days) = Average collection period
Financial ratio analysis and financial ratio formula