Diagnostic financier en anglais : Balance Sheet Ratios

Diagnostic financier en anglais  : Balance Sheet Ratios

A firm’s strength and weaknesses is established by viewing the relationship between items in the Balance sheet and profit and loss using ratio analysis.

A ratio is defined as the indicated quotient of two mathematical expressions. It can also be described as the relationship between two or more things.

It is used as a benchmark for evaluating the financial position and performance of a firm

Types of Financial Ratios

—  Liquidity ratios

Liquidity ratios measure a firm’s ability to meet its current obligations.

Current ratio   =Current assets / Current liabilities

Quick ratio = (Current assets – Inventories) / Current liabilities

Cash ratio = (Cash + Marketable securities) / Current liabilities

—  Solvency  ratios

Solvency ratios measure the dependence of a firm on borrowed funds.

Debt-equity ratio = Debt / Equity (Net Worth)

Debt ratio = Debt / (Debt + Equity) or Debt / Capital employed

Interest coverage = Earnings before interest and tax / Interest

—  Turnover ( chiffre  d’affaire )ratios

Turnover or activity ratios measure the firm’s efficiency in utilizing its assets.

Inventory turnober = Cost of goods sold or net sales / Average (or closing) investory

Days of investory holding = Number of days in the year (Say, 360) / Inventory turnover

Debtors turnover = Credit sales or net sales / Average (or closing) investory

Collection period = Number of days in the year (say, 360)/ Debotrs turn over

Current assets turn over = Net sales / Current assets

Net current assets turn over = Net sales / Net current assets

Fixed assets turn over = Net sales / Net fixed assets

Net assets turn over = Net sales / Net assets or capital employed

—  Profitability  ratios

Profitability ratios measure a firm’s overall efficiency and effectiveness in generating profit.

Margin = Profit before interest and tax (PBIT) / Net sales

Net margin = Profit after tax (PAT) / Net sales

Before tax return on investment = PBIT / Net assets

Return on equity = Profit after tax / Equity (net worth)

—  Equity-related ratios

Equity-related ratios measure the shareholders’ return and value.

EPS = Profit after tax / Number of ordinary shares

DPS = Dividends / Number of ordinary shares

Payout ratio = DPS/ EPS or Dividends / Profit after   tax

Dividend yield = DPS /Market value per share

Earnings yield = EPS / Market value per share

P/E ratio = Market value per share / EPS

Book value per share = Net worth / Number of ordinary shares

M/B value = Market value per share / Book value per share  

Tobin’s q = Market value of assets / Economic value of assets