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Financial Ratios & Analysis

Financial Ratios are best explained using an example. Below are sample financial statements of a business achieving it's target ratios.


Profit & Loss - Sample Client Ratios


Sales 1                                            2,400,000                    Double breakeven

Less COGS 2                                  1,440,000                                    

Gross Profit 3                                  960,000                      40% of Sales


Overheads 4                                     120,000                      50% of Employment Costs

Marketing 5                                      120,000                       5% of Sales

Employment Costs 6                       240,000                      25% of Gross Profit

Total Overheads 7                           480,000

Net Profit8                                       480,000                      20% of Sales    

        

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Balance Sheet - Sample Client


Inventory 9                                      250,000

Trade Debtors 10                           300,000

Trade Creditors 11                       (150,000)

Working Capital 12                       400,000

Fixed Assets 13                               350,000

Total Capital 14                            750,000


Total Debt 15                                  300,000                           40% Debt to Capital

Total Equity 16                                450,000                           67% Debt to Equity

Total Funding 17                          750,000





Gross Profit Margin  A measure of the proportion of revenue that is left after deducting all costs directly related to the sales.  
  Gross Profit 3 / Revenue 1    [$960,000 / $2,400,000 = 40%]
   
Net Profit Margin A measure of the proportion of revenue that is left after deducting all operating expenses.
  Operating Profit 8 / Revenue 1
   
Return on Capital Employed                     A measure of the efficiency and profitability of capital investment (ie. funds provided by shareholders & lenders).
ROCE monitors the relationship between the capital ('inputs') used by the business and the earnings ('outputs') generated by the business.
  Annualised EBIT 8 / Total Invested Capital 14
   
Debt to Capital The debt-to-capital ratio is calculated by taking the company's debt, including both short- and long-term liabilities and dividing it by the total capital.
Total capital is all debt plus shareholders' equity, which may include items such as common stock, preferred stock and minority interest.
Total Debt 15 / (Total Debt 15 + Total Equity 16 )
   
Working Capital Absorption A measure of the adequacy of working capital to support sales activity. This measure indicates the investment made in working capital for each unit of revenue.
  (Trade Debtors 10 + Inventory 9 + WIP - Trade Creditors 11 ) / Annualised Revenue 1
   
Return on Equity A measure of how effectviely the business has used resources provided by its owners to generate profits.
  (Annualised Net Income 8 / Opening Total Equity 16 )
   
Current Ratio A measure of liquidity. This compares total currents assets against total current liabilities.
    (Total Current Assets 9+10 / Total Current Liabilities 11 )
   
Quick Ratio Measures the availability of assets which can quickly be converted into cash to cover current liabilities.
    (Cash Equivalents  + Trade Debtors 10 )/Total Current Liabilities 11 )
   
Activity Ratio A measure of the efficiency in which the business manages its resources or assets.
  Annualised Revenue 1 / Total Invested Capital 14
   
Accounts Payable Days A measure of how long it takes for the business to pay it's creditors.
  Trade Creditors 11 x Period Length / Total Costs of Sales 2
   
Accounts Receivable Days A measure of how long it takes for the business to collect the amounts due from customers.
  Trade Debtors 10 x Period Length / Revenue 1
   
Inventory Days A measure of how efficiently the business converts inventory into sales.
  Inventory 9 x Period Length / Total Cost of Sales 2
   
Cash Conversion Cycle A measure of the length of time between purchase of raw materials and the collection of accounts from customers.
  (Inventory Days + AR Days + WIP Days - AP Days)
   
Debt to Equity A measure of the proportion of funds that have either been invested by the owners (equity) or borrowed (debt) and used by the business to finance its assets. 
  Total Debt 15 / Total Equity 16
   
Labour Productivity A measure of staff performance & efficiency against business output. 
  Gross Profit 3 / Employment Costs (Wages + Super + Payroll Tax + Workcover) 6
   
Economic Profit A measure of profit against cost of capital; where a positive economic profit represents the creation of value for shareholders.
Net Operating Profit After Tax - (Weighted Average Cost of Capital x Total Invested Capital 14 )
   
Break Even Point A measure to determine the amount of revenue or units that must be sold to cover fixed and variable costs associated with making those sales.
In Units   : Fixed Costs / Contribution Margin per Unit 
In Dollars: Sales Price per Unit x Break Even Point in Units