User:Radhika Shanmugam AGS/sandbox

Ratio Analysis:

•Ratio analysis involves evaluating the performance and financial health of a company by using data from the current and historical financial statements. •Ratio analysis help identify problem areas and bring the attention of the management to such areas.

Types of Financial Ratios:

Current Ratio: Current ratio = Current Assets / Current Liabilities (Tally, Xero) -liquidity and efficiency ratio. -measures a firm’s ability to pay off its short-term liabilities with its current assets. Best Current Ratio - 1.2 to 2 Current assets like cash, cash equivalents, A/R, Inventory, Prepaid expenses and marketable securities. Current liabilities are A/P, interest, taxes.

Acid Test Ratio / Quick Ratio / Working Capital Ratio: Acid test ratio = Current Assets - Inventory / Current Liabilities (Freshbooks, Tally) -compares a company's most short-term assets to its most short-term liabilities. -disregards current assets that are difficult to liquidate quickly such as inventory.

Debt Ratio: Debt ratio = Total Liabilities / Total Assets (Tally, Xero) -solvency ratio that measures a firm’s total liabilities as a percentage of its total assets. -0.4 or below is good debt ratio. -above 0.6 is poor debt ratio.

Gross profit Ratio: Gross profit ratio = gross profit / net sales (Tally, Freshbooks, Xero) -gross profit = sales - cost of goods sold -net sales = sales - (sales returns + allowances + discount) -0.5 is good ratio

Net Profit Ratio: Net profit ratio = net profit after tax / net sales (Tally, Freshbooks) -net profit after tax, which also includes rent, depreciation, employee salaries. -0.1 is good ratio

Receivables Turnover Ratio: Receivables turnover ratio = Net Credit Sales / Average A/R (Tally) -to quantify a company's effectiveness in collecting its receivables or money owed by clients/customers. -high ratio indicates, collection of accounts receivable is efficient.

Operating Cost Ratio: Operating cost ratio = Operating Income / net sales (Tally) -used to measure the operational efficiency of the management.

Return On Investment: Return on investment = (Current Value of Investment - Cost of Investment) / Cost of Investment (Tally) -measures the gain or loss generated on an investment relative to the amount of money invested.

Return on Working Capital: Return on working capital = Profit or loss before interest and taxes / (current assets - current liabilities) (Tally) -compares the earnings for a measurement period to the related amount of working capital.

Cash Flow to debit: cash flow to debit = cash flow from operations / total debts (Freshbooks) - cash flow from operations = net income + non-cash items + increase in working capital. - to analyse cash flow

Inventory turnover Ratio : Inventory turnover ratio = cost of goods sold / average inventory (Freshbooks) - measure of how well a company generates sales from its inventory.

Current Liabilities to net worth: Current Liabilities to net worth = Current Liabilities *100 / Net worth (Xero) -net worth = total assets - total liabilities -Indicates reliance on the equity for payment of debt.

Debt to Equity Ratio: debt to equity ratio = total liabilities / total equity (Xero) -compares a company’s total debt to total equity. -lower debt to equity ratio usually implies a more financially stable business.

Fixed assets to net worth: Fixed assets to net worth = Net fixed assets / net worth (Xero) -Net fixed asset is the purchase price of Land, buildings, equipment, machinery, vehicles, leasehold improvements. -portion of total assets that cannot be used as working capital.