Ratio Types Ratio Objective Ratios Notes

- Straight line method = Cost of asset Equal amount of depreciation deducted from
– residual value / Life span of asset Income statement
Depreciation Calculate the depreciation per year
Reducing balance methods= ( net Decreasing amount of depreciation deducted
book value- residual value ) X Rate % per year
How much CA the company reserve to face
-The ability of the current asset to meet WC = CA - CL
any business risk
current liabilities
The ability of the company current liabilities
-Liquidity ratios used to assess the ability
CR = CA/ CL to be settled from liquidation the current
of the company's mangers to meet the
asset
short term obligation by generate
Liquidity sufficient cash throw the liquidation of QR = ( CA- Inventory ) / CL
The ability of the company current liabilities
to be settled from liquidation the quick asset
the short term asset and its convertor
The ability of the company current liabilities
successfully to cash. Cash Ratio = Cash / CL
to be settled from cash
-Focuses on the company business risk
Liquid surplus = Liquid surplus( CA – Assess the increasing in sales how much need
related to the asset conversion cycles
CL)/Sales % from WC
Average date the company take from start
Inventory Average days = Inv./ COGS
-Asset management ratios used to assess purchasing RM till have finished goods and
x 365
the company efficiency of uses its sell it
resources(asset ) Account Receivable Average Days = Average date the company take to collect its
Asset management ratios analyze the AR / Sales x 365 receivables
Working Capital ability of the company to complete its Account Payable average days = AP / Average date the company take to pay for its
production cycle (Asset Conversion Cycle COGS x 365 credit purchased RM from suppliers
Ratio ( Asset
) efficiency in order to determine exactly CCC = ( Inv. DOH + AR DOH ) – AP
Management Ratio The GAP in days the company need to fitful
the risk of each stage of production and DOH
) how to mitigate this risk . Net Working Asset = ( Inv. + AR ) – The GAP in amount the company need to
Asset management ratios identify the AP fitful
period of each production cycle to assess Net Working asset Ratio = ( Inv. + AR How much Every one pound increasing in
the gap need to finance (from the ) – Ap / Sales X 100 sales need for new finance ( GAP )
suppliers or from banking facilities ). Retained Earning to sales= Retained How much the increase in sales financed from
earnings / Sales RE
- Profitability ratios is a financial matric Analyses how efficiency the company manage
Profitability Gross Profit Margin = Gross profit /
use to assess the firm`s efficiency in using its COGS (Direct operation cost) to generate
Ratio/Measure of Sales %
its resources and manage the direct and gross profit. Or the % of COGS the sales loss
 return the indirect cost to generate profit. at this stage .Or the company ability to shift
- Profitability ratios use to analyze the the increasing in COGS to end users ( Sales ).
shrinkage that affect the sales till reach to Analyses how efficiency the company manage
the net profit in order to show the weak its Overheads (Indirect operation cost ) to
Operating earning margin =
point occur at the income statement. generate operating profit .Or the % of
Operating earnings (EBITDA) / Sales
overheads the sales loss at this stage . Or the
%
company ability to shift the increasing in
overheads to end users ( Sales ).
Analyses how efficiency the company manage
other cost ( Interest , provision , FX …………)
Net Earning Margin = Net Earnings to generate Net earning margin .Or the % of
( EAT ) / Sales % other cost the sales loss at this stage . Or the
company ability to shift the increasing in
other cost to end users ( Sales ).
Analyses the company cost trend , The Higher
Operational Gearing = Gross profit /
means the company trend to FC , and the
Net Operating Profit %
lower means the company trend to VC
Return on equity ( ROE ) = Earning Assess when equity increase the affect on
before tax ( EBT ) / Total equity % EBT
Return on capital employed ( ROCE )
Assess when capital employed increase the
= EBT/ Capital Employed ( Equity +
affect on EBT
Long Term Debt ) %
Return on Asset ( ROA ) = EBT / Total
Assess investment on assets reflect on EBT
assets %
How the company depending on liabilities for
financing the total asset
- Solvency ratios used to assess the Debt ratio = Total Liabilities / Total The higher the ratio the more risk because
contribution of the company different assets % the company mor depend on liabilities for
sources of fund (Supplier facilities, Bank financing the asset more than the owner
debt, and owner's equity) to financing equity .
Measures of risk the company’s needs (Assets). This ratio shows the amount of finance the
- Solvency ratios give a clear vision of Debt – equity ratio (Leverage) = Total company borrow from different borrowers
and safety how the owner's support there owned liabilities / Owner equity % against each equity contribution.
(Solvency) company and the trustful from the The higher the ratio the more risk
company stakeholders. This ratio shows the amount of finance the
- Also this ratios assess the financing of Gearing Ratio = Total Borrowing company borrow from banking ( Debt bearing
the company business risk come from ( (Banking debt ) / Owner Equity % interest ) against each equity contribution.
Liabilities or owner equity ) The higher the ratio the more risk
Potential gearing = Total Borrowing This ratio use the drawing amount from
 (Banking debt)+ undrawn borrowing facilities and the undrawing amount to
facilities / Owner Equity % calculate the gearing
Assess the company operation ability to meet
Interest coverage (Earning basis) = the interest.
EBIT / Interest paid EBIT is an income statement items so its
according to accrual basis.
Assess the company cash generated from
Interest coverage (cash flow basis) = operation ability to meet the interest.
Operating cash flow before interest, Operating cash flow before interest cash flow
tax& dividends / Interest paid statement items so its according to cash
basis.
Assess the company cash generated from
Debt services coverage ratio (DSCR) =
operation ability to meet the FP (Financial
Operating cash flow before interest,
payment = Interest + CPLTD) .
tax& dividends /Total cost of finance
Operating cash flow before interest cash flow
( Interest paid + Principles +
statement items so its according to cash
dividends )
basis.
Sales growth = Sales Y2 – Sales Y1 /
The development of sales from year to year
Sales Y1 %
Earning growth = EAT Y2 – EATY1 /
The development of EAT from year to year
EAT Y1 %
Headcount growth = Number of
employees Y2 – Number of The development of number of employee
employees 1 / Number of employees from year to year
Y1 %
Sales per employee ( employee
The contribution of each employees in sales
productivity ) = Sales / Number of
OR the productivity of each employees
Operational employees %
performance ratio Earning per employees ( employee
The contribution of each employees in EAT
profitability) = EAT / Number of
OR the profitability of each employees
employees %
Fixed asset turnover = Sales / Fixed The contribution of each investment in fixed
Asset % assets in sales
Gross profit square meter per display
The contribution of each Square meter used
= Gross profit / Square meter used
for display on gross profit
for display
Average occupancy ratio = Number
Uses in hotels to assess the hotel operation
of rooms occupied / total numbers of
success to sell all its available rooms
rooms available
 Sales Gross profit pe machine hour = The contribution of each machine hour in
Sales / Machine hour available sales
The point at which the company didn’t have
Break even point = Fixed cost / gross loss or profit . After this point the company
margin ration *100 start gaining profit, Before this Point the
Break Even Point company start losses
Ratio Margin of Safety = Sales – Break even The percentage of sales may the sales loss
sales / Sales * 100 before the company start making losses
Required sales = Fixed cost + The targeted sales to achieve targeted
required profit / Gross profit required ROI ( Return on Investment )