Financial Statement Analysis

Financial statement analysis is the process of analyzing a company’s financial statements for decision-
making purposes. External stakeholders use it to understand the overall health of an organization and
to evaluate financial performance and business value. Internal constituents use it as a monitoring tool
for managing the finances.
The financial statements of a company record important financial data on every aspect of a business’s
activities. As such, they can be evaluated on the basis of past, current, and projected performance.
In general, financial statements are centered around generally accepted accounting principles
(GAAP) in the United States. These principles require a company to create and maintain three main
financial statements: the balance sheet, the income statement, and the cash flow statement. Public
companies have stricter standards for financial statement reporting. Public companies must follow
GAAP, which requires accrual accounting. Private companies have greater flexibility in their financial
statement preparation and have the option to use either accrual or cash accounting.
Several techniques are commonly used as part of financial statement analysis. Three of the most
important techniques are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis
compares data horizontally, by analyzing values of line items across two or more years. The vertical
analysis looks at the vertical effects that line items have on other parts of the business and the
business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.

Types of Financial Statements

Companies use the balance sheet, income statement, and cash flow statement to manage the
operations of their business and to provide transparency to their stakeholders. All three statements
are interconnected and create different views of a company’s activities and performance.
Balance Sheet
The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into
three parts to include a company’s assets, liabilities, and shareholder equity. Short-term assets such as
cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include
the company’s expense arrangements and the debt capital it is paying off; and shareholder equity
includes details on equity capital investments and retained earnings from periodic net income. The
balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered
a company’s book value and serves as an important performance metric that increases or decreases
with the financial activities of a company.
Income Statement
The income statement breaks down the revenue that a company earns against the expenses involved
in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken
into three parts that help to analyze business efficiency at three different points. It begins with
revenue and the direct costs associated with revenue to identify gross profit. It then moves
to operating profit, which subtracts indirect expenses like marketing costs, general costs, and
depreciation. Finally, after deducting interest and taxes, the net income is reached. Basic analysis of
the income statement usually involves the calculation of gross profit margin, operating profit margin,
and net profit margin, which each divides profit by revenue. Profit margin helps to show where
company costs are low or high at different points of the operations.
Cash Flow Statement
The cash flow statement provides an overview of the company’s cash flows from operating activities,
investing activities, and financing activities. Net income is carried over to the cash flow statement,
where it is included as the top-line item for operating activities. Like its title, investing activities include
cash flows involved with firm-wide investments. The financing activities section includes cash flow
from both debt and equity financing. The bottom line shows how much cash a company has available.

FINANCIAL PERFORMANCE
Financial statements are maintained by companies daily and used internally for business management.
In general, both internal and external stakeholders use the same corporate finance methodologies for
maintaining business activities and evaluating overall financial performance.
When doing comprehensive financial statement analysis, analysts typically use multiple years of data
to facilitate horizontal analysis. Each financial statement is also analyzed with vertical analysis to
understand how different categories of the statement are influencing results. Finally, ratio analysis can
be used to isolate some performance metrics in each statement and bring together data points across
statements collectively.
Below is a breakdown of some of the most common ratio metrics:

• Balance sheet: This includes asset turnover, quick ratio, receivables turnover, days to sales,
debt to assets, and debt to equity.
• Income statement: This includes gross profit margin, operating profit margin, net profit
margin, tax ratio efficiency, and interest coverage.
• Cash flow: This includes cash and earnings before interest, taxes, depreciation, and
amortization (EBITDA). These metrics may be shown on a per-share basis.
• Comprehensive: This includes return on assets (ROA) and return on equity (ROE), along
with DuPont analysis.

ANALYSIS OF FINANCIAL STATEMENTS

INCOME STATEMENT ANALYSIS
Most analysts start their financial statement analysis with the income statement. Intuitively, this is
usually the first thing we think about with a business… we often ask questions such as, “How much
revenue does it have?” “Is it profitable?” and “What are the margins like?”
There are two main types of analysis we will perform: vertical analysis and horizontal analysis.
VERTICAL ANALYSIS
With this method of analysis, we will look up and down the income statement (hence, “vertical”
analysis) to see how every line item compares to revenue, as a percentage.
For example, in the income statement shown below, we have the total dollar amounts and the
percentages, which make up the vertical analysis.
As you see in the above example, we do a thorough analysis of the income statement by seeing each
line item as a proportion of revenue.
The key metrics we look at are:

• Cost of Goods Sold (COGS) as a percent of revenue

• Gross profit as a percent of revenue
• Depreciation as a percent of revenue
• Selling General & Administrative (SG&A) as a percent of revenue
• Interest as a percent of revenue
• Earnings Before Tax (EBT) as a percent of revenue
• Tax as a percent of revenue
• Net earnings as a percent of revenue

HORIZONTAL ANALYSIS
Now it’s time to look at a different way to evaluate the income statement. With horizontal analysis, we
look at the year-over-year (YoY) change in each line item.
In order to perform this exercise, you need to take the value in Period N and divide it by the value in
Period N-1 and then subtract 1 from that number to get the percent change.
For the below example, revenue in Year 3 was $55,749, and in Year 2, it was $53,494. The YoY
change in revenue is equal to $55,749 / $53,494 minus one, which equals 4.2%.

BALANCE SHEET AND LEVERAGE RATIOS

Let’s move on to the balance sheet. In this section of financial statement analysis, we will evaluate the
operational efficiency of the business. We will take several items on the income statement and
compare them to accounts on the balance sheet.
The balance sheet metrics can be divided into several categories, including liquidity, leverage, and
operational efficiency.
The main liquidity ratios for a business are:

• Quick ratio
• Current ratio
• Net working capital

The main leverage ratios are:

• Debt to equity
• Debt to capital
• Debt to EBITDA
• Interest coverage
• Fixed charge coverage ratio

The main operating efficiency ratios are:

• Inventory turnover
• Accounts receivable days
• Accounts payable days
• Total asset turnover
 • Net asset turnover

Using the above financial ratios, we can determine how efficiently a company is generating revenue
and how quickly it’s selling inventory.
Using the financial ratios derived from the balance sheet and comparing them historically versus
industry averages or competitors will help you assess the solvency and leverage of a business.
CASH FLOW STATEMENT ANALYSIS
With the income statement and balance sheet under our belt, let’s look at the cash flow statement and
all the insights it tells us about the business.
The cash flow statement will help us understand the inflows and outflows of cash over the time period
we’re looking at.
Cash flow statement overview
The cash flow statement, or statement of cash flow, consists of three components:

• Cash from operations

• Cash used in investing
• Cash from financing

Each of these three sections tells us a unique and important part of the company’s sources and uses of
cash over a specific time period.
Many investors consider the cash flow statement the most important indicator of a company’s
performance.
Today, investors quickly flip to this section to see if the company is actually making money or not and
what its funding requirements are.
It’s important to understand how different ratios can be used to properly assess the operation of an
organization from a cash management standpoint.

RATES OF RETURN AND PROFITABILITY ANALYSIS

In this part of our analysis of financial statements, we unlock the drivers of financial performance. By
using a “pyramid” of ratios, we are able to demonstrate how you can determine the profitability,
efficiency, and leverage drivers for any business.
This is the most advanced section of our financial analysis course, and we recommend that you watch
a demonstration of how professionals perform this analysis.
The key insights to be derived from the pyramid of ratios include:

• Return on equity ratio (ROE)

• Profitability, efficiency, and leverage ratios
• Primary, secondary, and tertiary ratios
• Dupont analysis
Limitations of Financial Statement
Analysis
1. Not a Substitute for Judgement
An analysis of financial statements cannot take the place of sound judgment. It is only a means to
reach conclusions. Ultimately, the judgments are taken by an interested party or analyst on his/ her
intelligence and skill.

2. Based on Past Data

Only past data of accounting information is included in the financial statements, which are analyzed.
The future cannot be just like past. Hence, the analysis of financial statements cannot provide a basis
for future estimation, forecasting, budgeting and planning.

3. Problem in Comparability
The size of business concerns varies according to the volume of transactions. Hence, the figures of
different financial statements lose the characteristic of comparability.

4. Reliability of Figures
Sometimes, the contents of the financial statements are manipulated by window dressing. If so, the
analysis of financial statements results in misleading or meaningless.

5. Various Methods of Accounting and Financing

The closing stock of raw material is valued at purchase cost. The closing stock of finished goods is
value at market price or cost price whichever is less. In general, the closing stock is valued at cost price
or market price whichever is less. It means that the closing stock of raw material is valued at cost price
or market price whichever is less. So; an analyst should keep in view these points while making
analysis and interpretation otherwise the results would be misleading.

6. Change in Accounting Methods

There must be uniform accounting policies and methods for a number of years. If there are frequent
changes, the figures of different periods will be different and incomparable. In such a case, the analysis
has no value or meaning.

7. Changes in the Value of Money

The purchasing power of money is reduced from one year to a subsequent year due to inflation. It
creates problems in the comparative study of financial statements of different years.

8. Limitations of the Tools Application for Analysis

There are different tools applied by an analyst for an analysis. Even though, the application of a
particular tool or technique is based on the skill and experience of the analyst. If an unsuitable tool or
technique is applied, certainly, the results are misleading.
9. No Assessment of Managerial Ability
The results of the analysis of financial statements should not be taken as an indication of good or bad
management. Hence, the managerial ability can not be assessed by analysis.

10. Change of Business Condition

The conditions and circumstances of one firm can never be similar to another firm. Likewise, the
business condition and circumstances of one year to subsequent can never be similar. Hence, it is very
difficult for analysis and comparison of one firm with another.

Financial Ratio Analysis

Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by studying its financial statements such as the balance sheet and income
statement. Ratio analysis is a cornerstone of fundamental equity analysis.
Investors and analysts employ ratio analysis to evaluate the financial health of companies by
scrutinizing past and current financial statements. Comparative data can demonstrate how a company
is performing over time and can be used to estimate likely future performance. This data can
also compare a company's financial standing with industry averages while measuring how a company
stacks up against others within the same sector.
Investors can use ratio analysis easily, and every figure needed to calculate the ratios is found on a
company's financial statements.
Ratios are comparison points for companies. They evaluate stocks within an industry. Likewise, they
measure a company today against its historical numbers. In most cases, it is also important to
understand the variables driving ratios as management has the flexibility to, at times, alter its strategy
to make it's stock and company ratios more attractive. Generally, ratios are typically not used in
isolation but rather in combination with other ratios. Having a good idea of the ratios in each of the
four previously mentioned categories will give you a comprehensive view of the company from
different angles and help you spot potential red flags.

TYPES OF RATIO ANALYSIS

1. LIQUIDITY RATIOS
• Liquidity ratios measure a company's ability to pay off its short-term debts as they
become due, using the company's current or quick assets. Liquidity ratios include the
current ratio, quick ratio, and working capital ratio.
2. SOLVENCY RATIOS
• Also called financial leverage ratios, solvency ratios compare a company's debt levels
with its assets, equity, and earnings, to evaluate the likelihood of a company staying
afloat over the long haul, by paying off its long-term debt as well as the interest on its
debt. Examples of solvency ratios include: debt-equity ratios, debt-assets ratios, and
interest coverage ratios.
3. PROFITABILITY RATIOS
• These ratios convey how well a company can generate profits from its operations. Profit
margin, return on assets, return on equity, return on capital employed, and gross margin
ratios are all examples of profitability ratios.
 4. EFFICIENCY RATIOS
• Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its
assets and liabilities to generate sales and maximize profits. Key efficiency ratios include:
turnover ratio, inventory turnover, and days' sales in inventory.
5. COVERAGE RATIOS
• Coverage ratios measure a company's ability to make the interest payments and other
obligations associated with its debts. Examples include the times interest earned
ratio and the debt-service coverage ratio.
6. MARKET PROSPECT RATIOS
• These are the most commonly used ratios in fundamental analysis. They include dividend
yield, P/E ratio, earnings per share (EPS), and dividend payout ratio. Investors use these
metrics to predict earnings and future performance.

APPLICATION OF RATIO ANALYSIS

The fundamental basis of ratio analysis is to compare multiple figures and derive a calculated value. By
itself, that value may hold little to no value. Instead, ratio analysis must often be applied to a
comparable to determine whether or a company's financial health is strong, weak, improving, or
deteriorating.
Ratio Analysis Over Time

A company can perform ratio analysis over time to get a better understanding of the trajectory of its
company. Instead of being focused on where it is today, the company is more interested n how the
company has performed over time, what changes have worked, and what risks still exist looking to the
future. Performing ratio analysis is a central part in forming long-term decisions and strategic planning.
To perform ratio analysis over time, a company selects a single financial ratio, then calculates that ratio
on a fixed cadence (i.e. calculating its quick ratio every month). Be mindful of seasonality and how
temporarily fluctuations in account balances may impact month-over-month ratio calculations. Then, a
company analyzes how the ratio has changed over time (whether it is improving, the rate at which it is
changing, and whether the company wanted the ratio to change over time).
Ratio Analysis Across Companies

Imagine a company with a 10% gross profit margin. A company may be thrilled with this financial ratio
until it learns that every competitor is achieving a gross profit margin of 25%. Ratio analysis is
incredibly useful for a company to better stand how its performance compares to similar companies.
To correctly implement ratio analysis to compare different companies, consider only analyzing similar
companies within the same industry. In addition, be mindful how different capital structures and
company sizes may impact a company's ability to be efficient. In addition, consider how companies
with varying product lines (i.e. some technology companies may offer products as well as services, two
different product lines with varying impacts to ratio analysis).
Ratio Analysis Against Benchmarks

Companies may set internal targets for their financial ratios. These calculations may hold current levels
steady or strive for operational growth. For example, a company's existing current ratio may be 1.1; if
the company wants to become more liquid, it may set the internal target of having a current ratio of
1.2 by the end of the fiscal year.
Benchmarks are also frequently implemented by external parties such lenders. Lending institutions
often set requirements for financial health as part of covenants in loan documents. Covenants form
part of the loan's terms and conditions and companies must maintain certain metrics or the loan may
be recalled.
If these benchmarks are not met, an entire loan may be callable or a company may be faced with an
adjusted higher rate of interest to compensation for this risk. An example of a benchmark set by a
lender is often the debt service coverage ratio which measures a company's cash flow against it's debt
balances.
Examples of Ratio Analysis in Use

Ratio analysis can predict a company's future performance—for better or worse. Successful companies
generally boast solid ratios in all areas, where any sudden hint of weakness in one area may spark a
significant stock sell-off. Let's look at a few simple examples
Net profit margin, often referred to simply as profit margin or the bottom line, is a ratio that investors
use to compare the profitability of companies within the same sector. It's calculated by dividing a
company's net income by its revenues. Instead of dissecting financial statements to compare how
profitable companies are, an investor can use this ratio instead. For example, suppose company ABC
and company DEF are in the same sector with profit margins of 50% and 10%, respectively. An
investor can easily compare the two companies and conclude that ABC converted 50% of its revenues
into profits, while DEF only converted 10%.
Using the companies from the above example, suppose ABC has a P/E ratio of 100, while DEF has a
P/E ratio of 10. An average investor concludes that investors are willing to pay $100 per $1 of
earnings ABC generates and only $10 per $1 of earnings DEF generates.

What Are the Types of Ratio Analysis?

Financial ratio analysis is often broken into six different types: profitability, solvency, liquidity,
turnover, coverage, and market prospects ratios. Other non-financial metrics may be scattered across
various departments and industries. For example, a marketing department may use a conversion click
ratio to analyze customer capture.

What Are the Uses of Ratio Analysis?

Ratio analysis serves three main uses. First, ratio analysis can be performed to track changes to a
company over time to better understand the trajectory of operations. Second, ratio analysis can be
performed to compare results with other similar companies to see how the company is doing
compared to competitors. Third, ratio analysis can be performed to strive for specific internally-set or
externally-set benchmarks.

Why Is Ratio Analysis Important?

Ratio analysis is important because it may portray a more accurate representation of the state of
operations for a company. Consider a company that made $1 billion of revenue last quarter. Though
this seems ideal, the company might have had a negative gross profit margin, a decrease in liquidity
ratio metrics, and lower earnings compared to equity than in prior periods. Static numbers on their
own may not fully explain how a company is performing.
What Is an Example of Ratio Analysis?
Consider the inventory turnover ratio that measures how quickly a company converts inventory to a
sale. A company can track its inventory turnover over a full calendar year to see how quickly it
converted goods to cash each month. Then, a company can explore the reasons certain months lagged
or why certain months exceeded expectations.
The Bottom Line

There is often an overwhelming amount of data and information useful for a company to make
decisions. To make better use of their information, a company may compare several numbers together.
This process called ratio analysis allows a company to gain better insights to how it is performing over
time, against competition, and against internal goals. Ratio analysis is usually rooted heavily with
financial metrics, though ratio analysis can be performed with non-financial data.

Financial Ratio Analysis

A financial ratio is a comparison in fraction,
proportion, decimal or percentage form of two
significant figures taken from financial
statements.

Limitations of Financial Ratio Analysis

1. Ratios must be used only as financial tools, that

is, as indicators of weakness or strength and
not be regarded as good or bad per se.

2. Financial ratios are generally computed directly

from the company’s financial statements,
without adjustment.

3. Ratios are composite of many different figures –

some covering a time period, others an instant
time and still others representing averages
4. Ratios to be meaningful should be evaluated
with the use of certain yardstick:
a) Company’s own experience
b) Other companies in the same industry
c) Standard set by management
d) Rules of thumb

Financial Ratios based on: Leverage

Liquidity Profitability
Activity
Liquidity Ratios Liquidity Ratios
• Ratios that measure the firm’s ability to meet 1. Current Ratio
cash needs as they arise. 2. Quick or Acid Test Ratio
3. Cash-flow Liquidity Ratio
4. Working Capital to Total Assets
5. Defensive Interval Ratio

Current Ratio addition to the truly liquid assets

• Widely regarded as a measure of short-term (Cash+MS+COA) ÷ Current Liabilities
debt-paying ability.

Current Assets ÷ Current Liabilities Working Capital to Total Assets

• Indicates relative liquidity of total assets and
distribution of resources employed
Quick or Acid Test Ratio Working Capital ÷ Total Assets
• Much more rigorous test of a company’s
ability
to meet its short-term debts
Defensive Interval Ratio
Quick Assets ÷ Current Liabilities
• Measures length of time in days the firm can
operate on its present liquid resources
Cash-Flow Liquidity Ratio Quick Assets ÷ Projected Daily Operational
• Considers cash flow from operating activities Expense
in

Activity Ratios
• Ratios that measure the liquidity of specific
assets and efficiency in managing assets such
as A/R, Inv, and fixed assets

Activity Ratios
1. a) Accounts Receivable Turnover
b) Average Collection Period
2. Inventory Turnover
a) Merchandise Turnover
b) Finished Goods Inventory Turnover
c) Goods in Process Turnover
d) Raw Materials Turnover
e) Days supply in Inventory
3. Working Capital Turnover
4. Percent of each current asset to total current Asset
5. Current Assets turnover
6. Payable Turnover
7. Operating Cycle
8. Days Cash
9. Free Cash Flow
10. Investment or Asset Turnover
11. Sales to Fixed Asset
12. Capital Intensity
Accounts Receivable Turnover Working Capital Turnover
• Roughly measures how many times a • Indicates adequacy and activity of working
company’s accounts receivable have been capital
turned into cash during the year Net Sales ÷ Average Working Capital
Net Sales ÷ Average Accounts Receivable Bal
Percent of each current asset to TCA
Average Collection Period • Indicates relative investment in each current
• Helps evaluate the liquidity of accounts asset
receivable and the firm’s credit policies. Amt of each CA item ÷ Total Current Asset
365 days ÷ Accounts Receivable Turnover
Or Current Asset Turnover
Average A/R ÷ Average daily sales • Measures movement and utilization of current
(Net Sales/365) resources to meet operating requirements
(COS+Opex+IncTax+otherExp)
Average Current Asset
Merchandise Turnover *other expenses excluding dep and amort
• Measures the efficiency of the firm in
managing
and selling inventory.
Cost of Goods Sold ÷ Average Merchandise PayableTurnover
Inv • Measures efficiency of company in meeting
trade payable
Finished Goods Inventory Turnover Net Purchases ÷ Average Accounts Payable
• Measures the efficiency of the firm in
managing
and selling inventory. Operating Cycle
Cost of Goods Sold ÷ Average Finished • Measures the length of time required to
Goods convert
cash to finished goods; then to receivable and
Goods in Process Turnover then
• Measures the efficiency of the firm in back to cash
managing Average Conversion period of Inventories
and selling inventory. +
Cost of Goods Sold ÷ Average Goods in Average Collection Period of Receivable
Process +
Days Cash

Raw Materials Turnover

• Number of times raw materials inventory was Days Cash
used and replenished during the period. • Measures the availability of cash to meet
Raw Materials Used ÷ Average Raw average daily cash requirement
Materials Average Cash Balance ÷ (Cash Operating
costs/365 days)

Average Sales Period

• The number of days taken to sell the entire Total Asset Turnover
inventory one time / Measures the average • Measure of efficiency of firm in managing all
number of days to sell or consume the average assets
inventory Net Sales ÷ Total Assets
365 ÷ Inventory Turnover Or
Net Sales ÷ Average Total Investment
 Fixed Assets to Long term Liabilities
• Reflects extent of investment in long-term
Sales to Fixed Assets assets
• Test roughly the efficiency of management in financed from long-term debt.
keeping plant properties employed Fixed Assets (net) ÷ Total Long term
Net Sales ÷ Average Fixed Assets (net) Liabilities

Fixed Assets to Long term Liabilities

Capital Intensity Ratio • Reflects extent of investment in long-term
• Measures efficiency of the firm to generate assets
sales financed from long-term debt.
through employment of its resources Fixed Assets (net) ÷ Total Long term
Total Assets ÷ Net Sales Liabilities
Fixed Assets to Total Equity
Leverage Ratios • Measures the proportion of owners capital
• Ratios that measure the extent of a firm’s invested in fixed assets
financing , with debt relative to equity and its Fixed Assets (net) ÷ Total Equity
ability to cover interest and other fixed charges Fixed Assets to Total Assets
such as rent and sinking fund payments. • Measures investment in long-term capital
Analysis of Leverage assets
1. Debt Ratio Fixed Assets (net) ÷ Total Assets
2. Equity Ratio Book Value per share of ordinary share
3. Debt to Equity Ratio • Measures recoverable amount in the event of
4. Fixed Assets to long-Term Liabilities liquidation if assets are realized at their book
5. Fixed Assets to Total Equity values
6. Fixed Assets to Total Assets Ordinary SHE ÷ No. of outstanding OS
7. Book Value per Share or Ordinary Shares
8. Times Interest Earned Times interest Earned
9. Times preferred dividend requirement • Measures how many time interest expense is
earned covered by operating profit.
10. Times Fixed charges earned Net Income b4 Int and Tax ÷ Annual Int.
Charges
Debt Ratio
• Shows Proportion of all assets that are Times interest Earned
financed • Measures how many time interest expense is
with debt. covered by operating profit.
Total Liabilities ÷ Total Assets Net Income b4 Int and Tax ÷ Annual Int.
Equity Ratio Charges
• Indicates proportion of assets provided by Times Preferred dividend requirement
owners. Reflects financial strength and caution earned
to creditors • Indicates ability to provide dividends for
Total Equity ÷ Total Assets preference shareholders
Debt to Equity Ratio Net Income After Taxes ÷ Pref. Div. Req.
• Measures debt relative to amounts of
resources
provided by owners
Total Liabilities ÷ Total Equity
Times Fixed charges Earned
• Measures Coverage capability more broadly
than times
interest earned including other fixed charges
Net income before taxes and fixed charges
Fixed charges
(Rent+Interest+Sinking Fund payment b4
taxes)
Sinking Fund B4 taxes = Sinking fund
payment after taxes
1 – Tax Rate
Profitability Ratios
• Ratios that measure the overall performance
of
the firm and its efficiency in managing assets ,
liabilities and equity.
Used to measure Profitability and
Returns to Investors Cash Flow Margin
1. Gross Profit Margin • Measures ability of the firm to translate sales
2. Operating Profit Margin to
3. Net Profit Margin cash
4. Cash Flow Margin Cash flow from operating activities
5. Rate of Return on Assets Net Sales
6. Rate of Return on Equity Rate of Return on Assets
7. Earnings per share • Measures overall efficiency of the firm in
8. Price/Earnings Ratio managing assets and generating profits.
9. Dividend Payout Net Profit or Asset Turnover
10. Dividend Yield Ave. Total Assets x Net Profit Margin
Gross Profit Margin Rate of return on Equity
• Measures Profit generated after consideration • Measures rate of return on resources
of provided
cost of product sold. by owners
Gross Profit Net Income
Net Sales Average Ord. Equity
Operating Profit Margin Rate of return on Equity
• Measures profit generated after consideration • May also be computed as:
of Return on Assets x Equity multiplier
operating costs.
Operating Profit
Net Sales Equity multiplier = 1
Equity Ratio
Net Profit Margin
• Measures profit generated after consideration Earnings per share
of • Peso return on each
all expenses and revenues
Net Profit Net Income
Net Sales Average Ord. Equity