# Financial statement analysis/Accounting ratios analysis

Generally, financial ratios are classified on the basis of function or test, on the basis of financial statements, and on the basis of importance. These ……

Financial leverage (or only leverage) means acquiring assets with the funds provided by creditors and preferred stockholders for the benefit of common ……

Common size statement is one in which all the items are expressed as a percentage of a base item. Common size statements are helpful in discovering ……

Vertical analysis (also known as common-size analysis) is a popular method of financial statement analysis that shows each item on a statement as a percentage ……

Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that shows changes in the amounts of corresponding financial ……

Capital gearing ratio is a useful tool to analyze the capital structure of a company and is computed by dividing the common stockholders’ equity by fixed ……

Current assets to equity ratio (also known as current assets to proprietors’ fund ratio) shows the stockholders’ funds invested in current assets. The ……

Fixed assets to equity ratio measures the contribution of stockholders and the contribution of debt sources in the fixed assets of the company. It is computed ……

The proprietary ratio (also known as net worth ratio or equity ratio) is used to evaluate the soundness of the capital structure of a company. It is computed ……

Times interest earned (TIE) ratio shows how many times the annual interest expenses are covered by the net operating income (income before interest and ……

Debt to equity ratio is a long term solvency ratio that indicates the soundness of long-term financial policies of a company. It shows the relation between ……

Dividend payout ratio discloses what portion of the current earnings the company is paying to its stockholders in the form of dividend and what portion ……

Dividend yield ratio shows what percentage of the market price of a share a company annually pays to its stockholders in the form of dividends. It is calculated ……

Return on capital employed ratio is computed by dividing the net income before interest and tax by capital employed. It measures the success of a business ……

Earnings per share (EPS) ratio measures how many dollars of net income have been earned by each share of common stock. It is computed by dividing net income less preferred dividend by the number of shares of common stock outstanding during the period.

Return on common stockholders’ equity ratio measures the success of a company in generating income for the benefit of common stockholders.

Return on shareholders’ investment ratio is a measure of overall profitability of the business and is computed by dividing the net income after interest and tax by average stockholders’ equity.

Expense ratio (expense to sales ratio) is computed to show the relationship between an individual expense or group of expenses and sales. It is computed ……

Operating ratio is computed by dividing operating expenses by net sales. It is expressed in percentage.

Price earnings ratios (P/E ratio) measures how many times the earnings per share (EPS) has been covered by current market price of an ordinary share.

Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool ……

Net profit ratio is computed by dividing the net profit (after tax) by net sales. It is expressed in percentage.

Fixed assets turnover ratio (also known as sales to fixed assets ratio) is computed by dividing cost of sales by net fixed assets.

Working capital turnover ratio is computed by dividing the cost of goods sold by net working capital.

Average payment period means the average period taken by the company in making payments to its creditors.

Accounts payable turnover ratio (also known as creditors turnover ratio or creditor’s velocity) is computed by dividing the net credit purchases by average accounts payable.

An activity ratio that evaluates the liquidity of the inventories of a company.

Assets turnover is an activity ratio that measures the efficiency with which assets are used by a company.

Average collection period is computed by dividing the number of working days for a given period (usually an accounting year) by receivables turnover ratio . . . . .

Receivables turnover ratio (also known as debtors turnover ratio) is computed by dividing the net credit sales during a period by average receivables . . . . .

Current cash debt coverage ratio is a liquidity ratio that measures the relationship between net cash provided by operating activities and the average current liabilities of the company . . . . .

In addition to computing current and quick ratio some analysts prefer to compute absolute liquid ratio to test the liquidity of the business . . . . .

Quick ratio (also known as “acid test ratio” and “liquid ratio”) is used to test the ability of a business to pay its short-term debts . . . . .

Current ratio (also known as working capital ratio) is computed by dividing the total current assets by total current liabilities of the business . . . . .