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the topic of financial ratios well on a quick the note let me just give you what
exactly we are going to learn as you can see we here we have a complete chart of
so you can see there’s liquidity ratio turnover ratio operating profit a
profitability ratio business risk ratio financial ratios stability coverage for
the interest purpose so this will be a short summary or a snapshot of what we
are going to do today all this are the head points or the head ratios and below
that are all the type of ratios under that particular header like you know for
example liquidity has current quick absolute in cash ratio and so on and so
forth we are going to study for the rest so let’s begin but remember one thing
that you know financial ratios are the key indicators of the financial
performance of the company and I usually derived from the three statements that
includes your balance sheet P&L and cash flow statement so these financial ratios
will help in analyzing the company’s profitability liquidity assume the risk
as well as the financial stability now we are going to study the list of the
top 28 of financial ratios which formula and dikes okay let’s begin there are few
first one is we will try a new look at the liquidity ratios okay in that in the
liquidity ratio this is the first type it was below thin in that you know the
first type of the financial ratios is a liquidity ratio and this basically aims
to a determine you know the ability of the business to meet its financial
it can be short term or probably to maintain its short term date paying
ability so liquidity ratios can be calculated by multiple ways let’s begin
with the first one within the same first the current ratio okay
now current ratio is basically is a working capital ratio or its so
basically a banker’s ratio and the current ratio expresses the relationship
between the relationship of for current assets to current liabilities now the
current ratio formula is current assets CA divided by current liabilities okay
and a company’s current ratio can be compared with the past current ratios so
this will help you determine if the current ratio is high or low at this
period of time the ratio will be one is considered to be idle that is conditions
are twice of the current liability then no issued it will be good in repaying the
liability of the ratio is less than two repayment of the liability will be
difficult and works effects most effects can be seen the second is you know the
asset test ratio of the quick ratio now the current ratio is generally used to
evaluate an enterprise overalls of short term solvency or liquidity position but
what happens many times it is desirable no the more immediate position or
probably the instant debt paying ability of a firm then that indicated by the
current ratio over the asset ratio of the financial ratio is used so it is
related to the most liquid assets or to the current liabilities the formula is
basically what we call as the the quick assets okay
divided by the the current liabilities well that’s the formula of quick ratio
the third one is the absolute liquidity the ratio now what is the absolute
liquidity ratio so when we talk about the absolute liquidity ratio it helps to
calculate the actual liquidity and that the inventory and the receivables are
excluded from the current assets so for a better view of liquidity some assets
are excluded it may not represent the current cash flow ideally ratio
calculated 1:2 so the absolute liquidity is equal to your cash plus
marketable securities plus the net receivables and debtors then comes the
fourth one as the cash ratios well the cash ratio is useful for the
company who is undergoing differential trouble the formula goes as cash plus
marketable securities divided by your current liabilities now if this ratio is
high then it reflects the under utilization of the resources and if the
ratio is low then it can lead to problem in the repayment of the well this
was the type of the liquidity ratio the second type is the what we call as the
turnover ratios or the turnover financial ratios when we talk about it
on our financial ratios the second this second type of the financial ratio
analysis is the turnover ratio and the turnover ratio is also known as the
activity ratio this type of ratio indicates the
efficiency with which enterprise resources are utilized like for each
asset type financial research can be calculated separately okay we will start
with in the activity ratio that is your turnover financial ratio we will start
with the inventory turnover ratios now these financial measures this financial
ratio measures a relative size of the inventory and the influences of the
amount of the cash available to pay the liabilities so the inventory turnover
ratio formula is equal to the cost of goods sold COGS divided by the average
inventory okay well the next one in the in the same turnover financial ratio
is the debtors turnover ratio so this is basically the receivable turnover we
show you it shows how many times a receivable was turned into cash during
the period the next is the capital turnover ratios
well the capital turnover ratio measures the effectiveness with which the form
uses the financial ratio so the capital turnover ratio is is basically the net
sales that is the cost of goods sold Co GS divided by the capital employed
the fourth is the asset non over ratio well the financial ratio reveals the
number of the times and net tangible assets are turned over during the year
higher the ratio is better so the asset turnover ratio formula is basically your
turnover divided by the what we call as the net tangible asset then comes you
know the net working capital ratio in the same net working capital raised turnover
ratio so this financial ratio indicates whether or not the working capital has
been effectively utilized in making the sales so the net working capital
signifies the excess of the current assets or current liabilities the net
working capital is equal to the net sales divided by the net working capital
well the next one goes as 6/1 the cash conversion cycle now what is this so the
cash conversion cycle is the total limit or the time taken by the form to
convergence cash outflow into cash inflows so the cash conversion cycle
formula is equal to the receivable days – plus the inventory days less the
payable days so this were the types of all the turnover or the activity ratios
third is the operating profitability ratios
well this the third type of the financial ratio analysis is the
operating profitability ratio and the profitability ratio basically helps to
measure the profitability of the company through the efficiency of the business
activity it goes something like this the first one is the earning margin now
earning margin it is the ratio of the net income turnover expressed in
percentage so it refers to the final net profit that is used so that the formula
goes something like this the net income divided by the turnover
x 100 okay second is your return on capital employed or return on
the investments so this financial ratio measures the profitability in relation
to the total capital that is employed is the business enterprise the formula is
basically the return on investment the ROI is equal to the profit before
interest and tax okay divided by the total capital employed okay
the third formula is the return on equity it’s called the return on equity
ROE is a short form now return on equity is derived by taking the net
income divided by its shareholders equity so it provides a return which
management realizing from the shareholders equity so the return on
equity formula the returns I’ll just write the ROE is equal to the profit
after tax that is your Pat – the preference dividend divided by the
ordinary shareholders equity fund and that will be multiplied by 100 the next
one is your EPS which is also known as earning per share EPS is derived by
derived by dividing the profit of the company by the total number of shares
outstanding it means you know the EPS is equal to your earning after-tax less the
preference dividend divided by the the number of for ordinary shares so the
investor uses all the about ratios before investing and makes the maximum
profit and analyzes the risk though the ratio it is easy for him to compare and
predict the future growth of the company it is also it also simplifies the financial
statement well let’s go for the fifth one that is before we go next we have
another type that is fourth one the business risk ratios now what is the
business risk see this is the fourth type of the financial ratio analysis and
is the business risk ratio so here we measure how sensitive is the company’s
earning with respect to its fixed cost as well as the assumed debt on the
balance sheet well in that the first one that we have is the operating leverage
so the operating leverage is basically the percentage change in the operating
profit a little bit to its sales so it measures how sensitive the operating
income is to basically the change in the revenues now greater the use of the
fixed assets greater will be the impact of the change in the sales in operating
income the formula goes something like this is the operating OL leverage is
equal to the percentage change in EBIT divided by the percentage change you can
change in sales the next is called the financial ratio okay when we talk about
financial ratios financial leverage is the percentage change in the net profit
related to its operating profit and it measures how sensitive the income is to
the change in the operating in comes with a financial leverage primarily
originates from the company’s financial decision that is the use of the debt so
the financial leverage formula is equal to the percentage change in net income
divided by the percentage change in EBIT okay the next one is the
total leverage now the total leverage is the percentage change in the net profit
relative to its sales so the total leverage measures how sensitive the net
income is to the change in the sales so the total leverage formula goes
something like this is equal to the percentage change in net profit divided
by the percentage net change in sales the next in our list fifth one is the
financial risk ratio now which kind of ratios are financial reservation so this
is a fifth type of the financial risk analysis in the financial risk ratio and
here we measure how leverage is the company and how it is placed with
respect to its debt repayment some of the ratios are like the debt equity
ratio which measures it’s basically your long-term debt divided by the short term
funds and it helps to measures the extent of the equity to repay its debt
so it is used for the long term calculation in that the second one is
the interest coverage ratio one of the very important ratio that is used now
these financial signifies the ability to form to pay interest on the assumed debt
so the interest coverage formula is basically what we call as the a EBITDA
divided by the interest expense now higher the interest coverage ratio
implies greater the ability of the form to pay its interest and if the interest
coverage is less than one then EBITDA is not sufficient to pay off the interest
which implies finding other ways to arrange the funds the next thing that we
are going to discuss is the stability ratios this is the sixth type what kind
of stability ratios are there first is the fixed asset ratio now this ratio is
used to know whether the company is having sufficient fun funds or not to
meet the long-term business need then the formula is they fixed assets divided
by the capital employed the idle is 0.67 if the ratio is less than 1 then it can
be used for purchase of fixed assets the next type is in the same category is the
ratio to current asset sorry current asset to fixed asset the ratio and now
the formula for the ratio to current asset a fixed asset is current asset
divided by the fixed asset ratio and if the ratio basically increases the profit
increases in the reflects the business and is basically expanding let me
quickly run you through the sum of the type of the coverage ratio now the type
of the coverage ratio that you can use is like fixed interest cover fixed
dividend cover okay so those are the kind of the coverage ratios that can be
used then you have the control financial ratios analysis and it includes like
capacity ratios activity ratios and efficiency ratio which is basically your
standardized for the actual production you had where the actual RS so I hope
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