Fin Man Ratio

8/13/2019 Fin Man Ratio

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Financial

Ratios


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Among the many ratios which

have been developed from time

to time , the following 5 sets

are the most widely andusefully used


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Balance sheet Ratios

1. Liquidity ratiosmeasure the availability of

cash to pay debt.[

2. Debt ratiosmeasure the firm's ability to repay

long-term debt.

_____________________________Income statement and Balance sheet ratios

3. Coverage Ratio

Coverage ratios measure ability to service orcover various charges imposed on the firm.
http://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Financial_ratio


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..continuation

4. Activity ratio also known as efficiency

or turnover ratio measures how

effectively, the firm is turning over

assets or using converting non-cash

assets into cash.

5. Profitability ratios measure Return

achieved from its operations and

capital spending.


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1. Liquidity RatiosLiquidity ratios are used to measure the firms ability to meetshort-term obligations.

Liquidity ratios include Current ratio, determined by

Current Assets

---------------------------------

Current Liabilities


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Another measure is Quick ratio (Acid test),

here we take the current assets and subtract

the inventory (current assets minus inventory

is often referred to as the "quick assets") anddivide buy current liabilities.

Quick ratio (Acid test)=

(Current AssetsInventory) / Current

Liabilities


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2. Financial Leverage (Debt)RatioThe debt to equity ratio measures how muchmoney a company should safely be able toborrow over long periods of time.

It is done by comparing the organizationstotal debt (including short term and longterm obligations) and dividing it by the

amount of shareholder equity.

The result we get after dividing debt byequity is the percentage of the organization

that is indebted (or "leveraged").


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Suppose 1,454,000/ 1,796,000 = 0.81The above debt-equity ratio shows thatloan givers are providing 81 paisa offinancing for each Tk 1 being provided by

shareholders.

The normal level of debt to equity dependson industry type and depends on both

economic factors and society's generalfeeling towards credit.

Generally, any organization that has a debtto equity ratio between 40% to 50% haveno liquidity problems.

Why an organization / company should nothave debt/equity ratio of 0% or 100%


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Total debt by Total assets ratio

Suppose 1,454,000/ 3,250,000 = 0.45

This implies that 45% of assets are financedwith debt.


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3. Interest Coverage Ratio

Interest coverage ratio shows:

Earnings before Interest and Taxes (EBIT) /

Interest expenses.

If for a company EBIT/ Interest expenses =4.71

it means that the company has an ability tocover

4.71 times the annual interest expenses.

It indicates firm's ca acit to take more


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4. Activity ratios/operating

ratioActivity ratios/operating ratiomeasure howquickly a firm converts non-cash assets to

cash

assets

For example, Receivable turn-over ratio =

Annual Sales through provision of Loan /

Receivables at end of year

If the ratio is 5.89, it means accountsreceivable

have been turned over 5.89 times during a

year.


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Cont.

Receivables turnover in days or Averagecollection period is calculated by

(Receivables x Days in a year) / Annualsales through Loan provision

If the ratio is 62 days then it means thataccounts receivable are outstanding onaverage for 62 days or two months.

Similarly Accounts Payable period =(Accounts payable x Days in a year) /Annual Loan received


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5. Profitability ratios

Profitability ratiosmeasure the firm's

use of its assets and control of its

expenses to generate an acceptable

rate of return.

The ratio of

(Net SalesCost of goods sold) / Net

sales

If the ratio is 32.9%, it means that

32.9% of sales is profit.


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Cont.

Return on Equity is measured by:

(ROE) = Net profit after taxes /

Shareholders equity

If ROE is 11.19%, it means that

Return on equity is 11.19%


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The End

Fin Man Ratio

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