## Financial Ratios | Top 28 Financial Ratios (Formula, Types)

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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

types of the list of the financial ratios we will start with how about the

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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